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Designing Auto-Resupply Systems

Author(s):

Mary Lu Harding, C.P.M., CPIM, CIRM
Mary Lu Harding, C.P.M., CPIM, CIRM, Harding & Associates, Lincoln, VT 05443, 802/453-5379.

82nd Annual International Conference Proceedings - 1997 

Abstract. This paper outlines the process for designing and implementing an auto-resupply system. The planning process is described including determination of goals and appropriate participation. Different types of auto-resupply mechanisms are considered including Kanban, breadman, consignment, systems contracts and direct shipping from an MRP schedule.

The Planning Process. Selection and implementation of an auto-resupply system will be considerably smoother if the appropriate amount of planning is done prior to selecting a supplier. The first piece of work should be done by the buying organization which includes defining the goals and constraints of the system desired. The following steps outline the major planning decisions:

Step 1: Be clear about your goals. Why are you doing this? What do you want to achieve? Commonly encountered reasons for implementing auto-resupply systems include:

  1. Convenience. Auto-resupply systems alleviate the need for much of the paperwork involved in administering the flow of material including requisitions, purchase orders and invoices.
  2. Speed and/or flexibility. Auto-resupply systems appropriately established allow for lower levels of inventory and a faster, more flexible response from suppliers. The administrative delays involved with order-processing and receiving are gone, and the supplier is more prepared to respond to your requests. This can be a significant factor in meeting your customers' demands.
  3. Cost savings. Cost savings come both from lower inventory levels and from reduced administrative labor (resource recovery which can be deployed on other efforts). If your organization is under pressure to do more with fewer people, then this is one avenue that will allow for a shift in work emphasis.

Step 2. Define the commodity. It is most productive to put items on auto-resupply as an entire commodity as much as possible. The payback is much greater and the amount of labor to set up the system is only increased by a small amount. Define the boundaries of the commodity: what is included and therefore what is not included. For inventory items, determine a list of the part numbers. For expensed items, define categories of inclusion / exclusion. For example, the commodity "office supplies" may include all expendables (paper, pens, floppy discs, etc.) but not office furniture or computer hardware.

Step 3. Choose the team who will do this work. Implementation of an auto-resupply mechanism should always be done as a team effort. The system will affect many people, and their participation is critical to determining the best approach. Team members should include purchasing, representation from the user community, receiving and accounts payable. Once the appropriate people have been selected based on the commodity and its use, they will want the opportunity to redefine the goals and benefits to include their issues. Determination of the inclusive goals and benefits should be the team's first task.

Step 4. Define the material flow. Determine the material flow for the commodity as you would like it to be. Is the commodity inventory or expensed material? How many users / stock points are there? How predictable is the consumption? Based on your definition of the desired material flow, choose the system best suited to your needs. Tailor it to fit your organization's requirements.

Selecting The Appropriate System. There are numerous methods for auto-resupply, and new ones can be created to meet a customer's needs. They all have these criteria in common: definition of the demand signal and a method to predict usage, definition of "delivery," and a choice of payment options that defines cash flow with minimal paperwork. Some of the more common methods include:

Kanban. In a Kanban resupply system, the user defines the level of inventory carried (usually very little). When a unit of inventory is pulled into use, a signal is triggered that goes back to the supplier telling them to replace that unit. The supplier only ships on the signal to replace. As long as the inventory is not used, it is not replaced. In an external Kanban system, a "unit" is typically one shipping container. The signal can be anything that the user and the supplier agree to. Common options are: the empty container shipped back (and refilled), a reorder card attached to the box (either faxed or mailed), a telephone call to the supplier telling them what was pulled today. The signal goes directly from the point of use to the supplier. The replacement goods are delivered and invoiced.

Breadman. Named for the grocery store restocking process, breadman resupply is done by the supplier who visits the stockpoints on a regular schedule, reviews the inventory levels, removes any damaged or outdated goods and restocks the inventory to a predefined level. The supplier obtains a receipt for the inventory restocked and invoices accordingly.

Consignment. In this arrangement, the supplier keeps an inventory on the customer's premises and owns that inventory until the customer withdraws it for use. The consignment agreement defines what level of inventory will be stocked, how it will be accounted for and who owns liability for damage or loss (usually the customer). It also defines at what point ownership transfers and how consumption is recorded and invoiced.

MRP Releases. For inventory material whose demand is calculated by an MRP system, the output of MRP can be used as a release signal directly. An agreement with the supplier specifies which periods can be shipped and the ownership of liability over time (for example, authorization to ship the first three periods plus ownership of in-process inventory for an additional four periods). Once expectations have been defined, the output of MRP is sent to the supplier each time the data is regenerated, and the supplier manages shipments to the schedule as indicated.

Systems Contracts. A systems contract is an arrangement with the supplier that specifies the commodity and item pricing (usually by establishing a price formula such as a discount off list price), a mechanism for direct ordering by users, typically direct delivery by the supplier, and often consolidated invoicing. It is used for standard catalogue items of lesser value such as office supplies, common tools or packaging materials.

General Considerations. To tailor the most appropriate auto-resupply system to your specific situation there are several factors to be weighed:

  1. How many items are there in the commodity and how many stocking locations are there? Kanban systems and consignment inventory become more difficult to manage with a large number of stocking locations. Systems contracts or breadman resupply systems may be better suited for these circumstances.
  2. How close to your facilities is the supplier located? Breadman resupply depends on regular visits from the supplier. Is this feasible? Distance may also affect lead time and how the signal to the supplier should be conveyed.
  3. How many people will be involved in conveying demand to the supplier? Systems contracts can be established with many users (for example, office supplies ordering). Using MRP as the release mechanism for inventory shipments typically involves only the buyer or the planner responsible for the item.
  4. How much inventory do you want to carry? Consignment results in the lowest inventory for your company since the supplier owns the material until it is used. Kanban creates the next lowest level of inventory which is controlled by the number of Kanban signal devices (cards, totes, etc.) in the system. Breadman requires defined maximum inventory levels; the supplier will count the inventory remaining and refill missing items up to the defined maximum level. Using MRP as a release tool will generate the level of inventory specified in MRP (i.e. safety stock) plus inventory generated by schedule changes within lead time. Systems contracts allow users to request material on demand. MRP-release systems are limited to inventory items only. Kanban and consignment inventory are typically used for inventory items. Systems contracts and breadman resupply can be used for either inventory material or expensed materials.

Implementation.

Step 1. Define the specifics of the process as you want them to be. For users this means defining the inventory levels, the stocking points, the people who will signal suppliers to ship and the nature of the signal to the supplier.

For receiving, the definition includes FOB point, the nature of the receiving transaction and where it will take place. For consignment inventory, the FOB point is the point of issue; the inventory may be restocked by the supplier if they are geographically close or through the regular receiving process if they are distant. How will receipts be recorded with no purchase order to reference and without showing up on your books as inventory? In Kanban systems, the supplier often delivers the goods to the point of use in production where the marked Kanban location is. The receiving transaction often takes place there. In breadman resupply systems, the supplier restocks the inventory levels, records what additional inventory is put in place and takes that data to the person who will do the receiving transaction (which may or may not be located near the docks).

For accounts payable, the definition includes price verification, whether or not an invoice will be used, frequency of invoicing and invoice format. Some of the options are payment on receipt of goods, not on receipt of invoice. In this option, the generation of the receiving transaction automatically triggers payment for the quantity received at a predetermined price. It works well when there are no ancillary charges such as shipping costs and the price is defined and stable. Another option is a consolidated invoice. This is particularly attractive for systems that involve frequent delivery of multiple line items. The supplier invoices once a month with an itemized statement of all deliveries during the period, and accounts payable issues one check. If the items are expensed and accounting plans to cross charge the costs to different budgets, they may want to specify the format for line items on the invoice to insure that they have the necessary information by line item to do the cross-charge.

For purchasing, definition includes source selection, price, renewal, performance measurements and cancellation. Auto-resupply systems may stay in place for years if they are working as the organization wants them to work. Plan that this effort will result in a long term arrangement. Therefore more time may be required to do the initial groundwork. A single source will be selected. Look at the broadest possible array of potential suppliers to insure that the best candidate is chosen. A firm price may be negotiated for a time, but may not be sustainable over many years. Negotiate for a firm price on the front end and a formula by which price will be determined after that. Include a provision for renewal of the agreement (indefinitely) at buyer's option. If the arrangement is working well, it makes no sense to go through the reselection process every year. However, if the arrangement is not working to the satisfaction of all parties and the problems cannot be resolved, a provision for cancellation may be important. Define performance expectations and how performance will be measured - especially delivery performance.

Step 2. Send the RFP to suppliers. Make sure that the RFP describes the system as you want it to be in as much detail as you have defined. The more clearly you can describe what you want, the easier it will be for a supplier to determine if they can meet your needs and prepare their proposals accordingly. If they cannot meet your needs, they may propose alternatives which are worth examining. If they have no intention of meeting your needs, they will usually signal that they are not a viable candidate either by saying so directly or by submitting a proposal that shows clear lack of commitment.

Step 3. Select the supplier. Based on the responses to your RFP, select the supplier who is the most viable and negotiate any remaining details until you reach a mutually acceptable arrangement. Formalize the arrangement to which you have agreed by putting it in writing. As the complexity of the arrangement increases, the potential for misunderstanding also increases, especially at the beginning. If the agreement continues to be renewed in subsequent years, a written contract becomes less and less necessary.

Step 4. Put the system in place. Do whatever work is necessary to get ready to begin. For example, define inventory locations and/or levels, define invoice format, etc. When you think you are ready to begin, have the supplier fulfill a "dummy" order cycle so that both companies can test the process all the way through. Check for snags and fix them.

Step 5. Train all involved personnel. In an MRP release system, there may only be a few people involved with the changes, and to the rest of the organization the change is transparent. However, in a systems contract for office supplies, there may be hundreds of potential users. Judge the magnitude of training based on the number of people who will be involved in signaling suppliers, receiving goods, and paying for them. Before you can begin, everyone involved needs to know what to do and what the benefits of the change will be.

Step 6. Begin. Set a start date after which the system is operational.

Step 7. Monitor closely. Especially for the first three months, everyone on the team that created the system should monitor it closely. Everyone using the process will have a learning curve to go through, and mistakes are likely at the beginning - both in your company and at the supplier. It is important to catch any problems quickly and resolve them before they can grow big enough to jeopardize the entire effort. Early attention will help the system build credibility with users while loss of credibility through unresolved problems will become increasingly harder to surmount.

Step 8. Review periodically. As the system becomes more entrenched, monitoring can become less frequent. However it will remain important to review performance on a regular basis throughout the life of the arrangement. Joint reviews between the creation team and the supplier at least once a year will provide a communication vehicle to insure continued good relations and performance.


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