Customer Intimacy: The Right Inventory Released When Needed (2 of 6)
Here’s a basic inventory and ordering question:
How do you, a manufacturer, satisfy not the need a customer is communicating to you via Electronic Data Interchange (EDI) orders—which is lumpy demand—but fulfill their real needs relative to their own customers’ use? (Lumpy or intermittent forecasts, or worse, lumpy customer orders, are the ones where demand is erratic and unpredictable.)
Vendor Managed Inventory (VMI) to the Rescue … But It’s Not Enough
In a previous post we discussed vendor managed inventory [link to 1st in the series]. We explained how Wal-Mart teams up with suppliers or vendors to manage their inventories at the store level across enormous volumes and a mind-boggling number of SKUs (stock keeping units). VMI is built on a vendor having visibility into inventory, releasing products as needed, matching the velocity of inventory movement to the point-of-sale or end-use consumption. Planned volumes are released in an uninterrupted, smooth flow.
To replicate this flow in manufacturing, it takes a little more work. When customers give you an open or blanket PO (Purchase Order) at the beginning of the year, they expect to never run out of any of the components they're ordering from you. Therefore, you manage stock levels in your customer’s raw materials inventory. At this stage, you’re just trying to replenish, make sure they never run out of stock. That’s one level, but you're two levels removed from your customer’s own demand. You may be getting visibility into what they're consuming from you, but not necessarily seeing what they're actually selling to their customers which then triggers a consumption of their raw materials. If they get lumpy demand or if they just decide to produce large lot sizes, you're still not getting true visibility into how they're filling the demand for their own customers.
A Note About Blanket or Open POs
A blanket or open PO can satisfy customer demand for the whole year and they get discounted pricing based on a large volume. (There's usually some provision for incremental shipping costs.) Customers do not desire all that quantity at once, however. Out of a large blanket PO for say one thousand parts (we often see it as a PO in the system that is open for December), customers send you what they call a release for 50 or 20 at a time.
Consider the model above, which, if achieved, builds a very intimate relationship with your customers.
As a manufacturer, you can supply to customer demand. It may sound shocking but that's the worst situation to be in. A better approach is to institute VMI where you're always responsible for enough stock or a certain level of stock at your customer. The ultimate level you want is to gain visibility on your customer’s demand. If you know when your customer is selling parts, you can start to replenish the raw material that they haven't consumed yet. That’s a smooth, anticipatory, intimate, and highly profitable relationship for all parties concerned.
Measurable Added Value, Not Just Hype
You are saving your customers time and expense by determining what and when they should order from you. Frankly, you can determine needed quantities with the right software and thoughtware tools, far better than any of their people. This kind of efficiency is a huge value add because purchasing departments spend a lot of time with their customers figuring out when they should give you a PO, or place an order, or place a release against an open PO or a blanket PO.
However customers order now, begin to nudge them along the path to VMI with visibility into a customer’s own demand and be way ahead of the curve. Sadly, not a lot of manufacturers we run into are doing that. On-Time Edge knows how to do that. We do it, and we do it very well. And that is very attractive for our customers and their customers.
Start Getting Ahead of the Curve
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How you can transition your customers over to a vendor managed inventory process.
The latest techniques for planning and scheduling production in your plant or multi-plants.
A Quick-Start implementation approach to enable a more stable, proactive, and productive planning/scheduling process as soon as possible.