Last week we’ve discussed the procurement process in detail and how a vendor managed inventory model would shape an ERP system. One point I’d like to go in a bit more detail is about the vendor managed inventory (VMI) model when it comes to stock management. This model is effective because it gives suppliers a lot of information about how their products are selling and thus be able to coordinate their orders and shipments accordingly.
In supply chains, particularly forecast driven supply chains, one of the hardest phenomenon to control is the bullwhip effect. This happens when small changes in end customer demand causes larger quantities in order placed as it moves upstream in the supply chain. Each participant along the supply chain reacts to the signals from downstream by ordering larger quantities to build up safety stock in order to protect against stock outs. I should highlight that actual end customer demand is hidden to the upstream participants.
When suppliers have access end customer demand information, they can effectively reduce unnecessary inventory, which leads to lower cost all around. In addition, it allows the supplier to develop much better forecasts for future demand of a certain product.
So how is ERP involved? While researching this online, I’ve found that there are actually several ways to implement this process. For instance, SAP offers three different ways:
- Standard, non-consigned (customer sends stock/sales data from its ERP system to the vendor).
- Consigned (vendor maintains and manages its inventory at the customer’s site and handles replenishment planning on behalf of the customer).
- Parallel consigned and non-consigned (for organizations handling both types at the same time).
The key takeaway to successfully using VMI is that ERP systems allow the data that is transmitted between customer and supplier to be accurate, complete, and in real-time. This lets vendors make informed decisions that lead to reduced costs, better customer service, and improved forecasting.
Image Source