Let’s say your company uses a “breadman” auto-resupply system as part of a vendor managed inventory (VMI) program in an effort to enhance the value and “stickiness” of your relationship with customers. If performed properly, both you and your customers are enjoying notable benefits from this symbiotic relationship. However, it is likely you are incurring costs that are negatively impacting the profitability of your VMI-based business with those customers.
Chief among those profit-infringing costs are expenses involved in implementing your “breadman” system, human and capital resources used to circulate personnel to customer locations and manage the replenishment of goods to meet customer expectations. As costs escalate in conjunction with the resources needed, the overall viability of your VMI program may even be in trouble.
A significant amount of planning is needed when selecting and implementing the appropriate auto-resupply system, as it will make for smoother processes in the long-run. In U.S. manufacturing, there are numerous approaches to auto-resupply, including the ability for customization. While there are multiple methods, they all have the same criteria: definition of a demand signal, a process to predict usage, delivery controls, and payment options. Of the many possibilities for auto-resupply systems, we listed the most common approaches and how they work below. This information was extracted from an article published in the Institute for Supply Management’s 82nd Annual International Conference Proceedings, “Designing Auto-Resupply Systems” by Mary Lu Harding, CPM, CPIM, CIRM.
In a Kanban-based resupply system, the customer and supplier agree on a level of inventory to be carried for a given item and a predefined unit quantity to be used in replenishing the item back to the original inventory level once the goods have been consumed. When the on-hand quantity of an item drops below its predefined stock keeping level, a signaling method is triggered to advise the supplier that a replenishment unit quantity must be provided. The signal can be anything to which the user and the supplier agree. Usually, the customer takes title to the goods upon initial delivery by the supplier.
Using the consignment method, the supplier manages the inventory for an item being kept 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 captures at what point ownership transfers and how consumption is recorded and invoiced.
Named for the grocery store restocking process, the breadman resupply is completed by the supplier who visits the stocking locations of a customer on a regular schedule. During these visits, the supplier reviews the inventory levels for a given item currently on-hand, removes any damaged or outdated goods and restocks the inventory to a mutually agreed upon, predefined level. Once finished, the supplier obtains a receipt for any restocked inventory and invoices accordingly. With the breadman system, the title for the goods usually transfers from the supplier to the customer upon delivery of the replenished inventory quantities.
For inventory items managed by an MRP system implemented by the customer, the replenishment signaling outputs of the customer’s MRP can be used as a release signal directly by the supplier. An agreement with the supplier specifies which periods can be shipped and the ownership of liability over time (e.g., 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.
A systems contract is an arrangement with the supplier that specifies a catalog of goods that employees can purchase, pricing for those goods (usually by establishing a price formula such as a discount off list price), a mechanism to be used for direct ordering by employees (typically direct delivery by the supplier) and often consolidated invoicing. It is frequently used for low-cost goods that are expensed by the purchaser upon receipt (such as office supplies), common tools or packaging materials.
There are also combinations of these methods in common use. For instance, an arrangement between a customer and a supplier may be made for an automated inventory replenishment program that is managed under breadman techniques but is invoiced and accounted for as a supplier consignment.
With the emergence of Internet of Things (IoT) technology in the marketplace, it is now feasible to reduce or eliminate expenses being incurred in running your breadman system with your customers.
Smart Devices and the IoT
In 2009, Fremont, Calif.-based Loadstar Sensors, Inc. received a U.S. patent on a system identified as a “sensor-based inventory management system and method.” In the patent, Loadstar proposed the use of a smart sensor device such as a digital loadcell to weigh items comprising a given amount of inventory and convert that weight into unit quantities. The resulting count of inventory items would then be transferred to inventory management software to update the quantity on-hand of that item in that given location. In its patent, Loadstar extrapolated the use of this technology specifically for suppliers who are managing inventories of goods for their customers.
Today, Loadstar offers a system to do just that. It uses loadcells to capture the weight of items in a stocking location, converts that weight into unit quantity counts, and then wirelessly transmit the resulting data via a web service to the Internet where it can be accessed to manage the inventory levels and replenishment needs for that item in that stock-keeping location.
Using a system, such as the one offered by Loadstar, makes it possible for a supplier to monitor on-hand inventory quantities at a customer’s location in real time and react to changes in that information without the need to travel to the customer’s location and physically review the inventory. Since the information is accessible via the Internet, both the supplier and customer can work off the exact same data records, eliminating any confusion or concern stemming from differing counts at differing times. This saves time as well as the expenses involved with personnel, their transport and the equipment they use to collect information. Further, the data can be integrated into the inventory management systems (similar to an ERP system) of both companies, allowing either or both to update or reconcile records electronically.
Read More: Technology will continue to play a major role in manufacturing. Learn how implementing a mobility strategy can transform your business in our blog post, Boost Operations & Productivity in Your Manufacturing Organization with a Mobility Strategy.
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