SEVEN KEYS TO WINWIN VMI
PARTNERSHIPS FOR
AEROSPACE
COMPANIES
Getting from ‘push’ to ‘pull’ using
vendor-managed inventory.
WHITE PAPER
Andy Bergin / V4 / Apr 2012
©Waer Systems Limited 2013
© Copyright Waer Systems 2013
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Introduction
Aerospace and defence companies know it is imperative that they become
more responsive to customer demand across their entire range of products –
but cannot afford to stock tremendous amounts of inventory to ensure service
levels.
Transitioning from a 'push' supply chain methodology to a demand-driven 'pull'
approach lets suppliers sense and respond to actual customer demand signals
and gain continuous visibility to customer/market activity. In recent years,
demand-driven supply networks have dramatically streamlined the amount of
on-hand inventory, slashed delivery times, and boosted supply reliability for
major aerospace manufacturers and suppliers, including Airbus, Schenker and
others.
The key to the ‘pull’ approach is efficient implementation of vendor-managed
inventory (VMI). VMI provides clear, unfiltered demand signals so that the right
products are continually pulled into the right places at the right time, with
continuous replenishment at the point of consumption.
This white paper shows how to make this approach succeed in relation to the
aerospace supply chain.
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Seven Keys to Successful VendorManaged Inventory in the
Aerospace Industry
What is VMI?
Vendor-managed inventory provides a streamlined approach to inventory
management and order fulfilment, based on collaboration between suppliers
and their customers (e.g. distributor, OEM, or product end user) linking the
supplier directly to actual customer demand.
Essentially, VMI is inventory that resides with the customer while still
monitored and managed by the supplier. The customer consumes directly from
stock held on site while the supplier has full visibility of the actual inventory
levels.
A special type of VMI is ‘consignment inventory’ in which the customer holds
vendor-owned inventory on-premises, and purchases stock only as it is
consumed. We’ll come back to this very powerful VMI option later in the paper.
VMI changes the traditional order process. Instead of sending purchase orders,
customers electronically send daily demand information to the supplier. The
supplier generates replenishment orders for the customer based on this
demand information. The process is guided by mutually agreed-upon objectives
for the customer's inventory levels, fill rates, and transaction costs.
Why VMI?
VMI is an indispensable element in many companies’ demand-driven supply
chain programs, and can be especially advantageous in the Aerospace industry,
with its deep and complex bills of materials and proliferation of parts depots.
Whether used in manufacturing, sub-contracting, or maintenance repair
operations (MRO), vendor-managed inventory drives efficiencies while
delivering significant benefits to cash flow and capital requirements. Consigning
stock to the local warehouse reduces inventory risk and repetitive operational
costs while smoothing out the whipsaw effect of uneven demand flow. Because
ownership of the inventory stays with the vendor, production lines focus on
their core missions, and businesses manage cash and capital better while still
gaining benefit from supply chain management.
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VMI aligns business objectives and streamlines supply chain operations for both
suppliers and their customers.
Getting the Most Out of Your VMI Partnership
For customer and supplier, VMI is a ‘rising tide that lifts both boats’. The closer,
more effective working relationship is a win-win, delivering many benefits as
the partners work together to create demand visibility and share the
information needed for smart planning.
Here are some key points to keep uppermost in mind as you implement a
profitable and mutually beneficial VMI relationship.
Key #1: Regular Reviews Lock in Productivity Improvements
One of the biggest opportunities for customer savings from VMI is the reduced
cost of carrying inventory. VMI helps increase turns by reducing the need for
safety stock.
Conduct weekly reviews of demand and inventory information. This allows close
monitoring of order point calculations. The supplier will be better able to
control the lead time component of order point calculations, making them
much more accurate
Conduct daily comparisons of on-hand inventory to order points. This will
ensure rapid replenishment ordering when stock falls below the order point.
Make reviews and comparisons on a regular schedule, as close as possible to
the weekly/daily frequencies recommended above.
Key#2: Set a Tangible Goal for Reducing Administrative Costs
VMI fundamentally reduces the cost of purchasing administration for the
customer. Your goal should be to reallocate 50 per cent of buyer time to highervalue activities.
Reduce the effort expended in maintaining purchasing information, reconciling
invoices to purchase orders and other administrative tasks, by shifting more
responsibility for replenishment to the supplier.
With demand and inventory monitored more frequently and better order
calculations, expect fewer rush orders, and fewer orders over all.
Create a constant flow of information between customer and supplier using
common data. For instance, if the supplier changes lead time, the next order
should automatically reflect that.
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Key #3: Profit from ‘Favoured Partner’
Status
VMI is one of the best tools available for
building stronger supplier-customer
relationships.
Suppliers often favour VMI customers in times
of scarce supply in order to meet agreed
objectives. A typical supplier VMI planner
manages fewer items than a typical customer
buyer (who may deal with items from
hundreds of suppliers), and so is also more
likely to investigate and respond to unusual
occurrences in demand or inventory.
A regularly scheduled automatic process
recognises the need to replenish and should
result in minimal stock-outs and shortages,
while improving fill rates. With full visibility to
true demand along with better information
about factors such as lead time, product
launches, and packaging changes, the supplier
can better manage order calculations.
VMI can focus both parties on
operational/P&L issues – not just product &
price. A good strategic supplier can show the
customer things about themselves they didn't
even know. And a good strategically-minded
customer values business-driver benefits that
go beyond reductions in operating costs.
Key #4: (for distributors and retailers):
Make VMI Part of Your Sales Strategy
Review the product mix based on VMI’s better
demand visibility to improve your ‘batting
average’ in having the right product, in the
right place, at the right time.
Plan collaboratively with the supplier when
introducing new products and to prepare for
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VMI Benefits
Summary
• Reduced inventory
• Increased inventory
turns
• Lower carrying costs
• Elimination of
shortages
• Inventory availability
to cover demand
fluctuation
• Reduced risk of
obsolescence
• Reduced freight
costs
• Enhanced customer
service levels
• Reduced
administrative costs
• Increased sales
(distributors, retail)
• Reduced write-offs
• Reduced
procurement,
materials
management costs
• Increased
productivity and
profitability
• Greater focus on
core competencies
• Shortened cash
conversion cycle
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exceptional demand cycles; take full
advantage of special sales opportunities.
For distributors and retailers VMI means
fewer lost sales opportunities in the near
term and improved customer loyalty over the
long term.
Key#5: Establish a ‘Lower Order Count’
Mind-set
A more consistent order process, where the
supplier regularly evaluates the complete
customer requirement, should lower the total
order count by 4–6 per cent. Fewer orders
results in downstream savings in warehouse
pick time, transportation scheduling, accounts
receivable, and invoice reconciliation. So even
though the supplier takes responsibility for
replenishment in the relationship, operating
cost savings can easily offset the costs of
implementing VMI.
Expect to see a drop in emergency/expedited
orders; monitor the change in ordering habits
to verify an improvement. Also, improved
collaboration on product replacements, etc.
should result in fewer returns of 'dead'
inventory while transportation costs may
drop due to consolidation opportunities.
Key #6: Focus on Strategic-Level Cost
Savings
Strategic cost savings are a big benefit of
placing a substantial portion of business for
particular items or item groups under VMI.
Create a common perception among all
stakeholders that VMI will effect reductions in
finished goods inventory through more
efficient response to demand variation,
improved forecast accuracy, and a better
© Copyright Waer Systems 2013
An Example of
Vendor-Managed
Inventory in Action
Schenker
Schenker provides
transport and logistics
solutions spanning 1,100
strategic points around the
globe, including a solution
that manages local
stockholding of critical
parts for airlines, requiring
minimal customer
infrastructure investment.
Schenker needed to extend
its existing value
proposition to OEMs, but
its existing ERP could not
provide internet-based
VMI capabilities.
WAERlinx, provides
Schenker an on-demand,
software-as-a-service
(SaaS) system that provides
complete supply chain
visibility for OEM
customers. Schenker has
implemented WAERlinx at
London Heathrow Airport
(LHR), Singapore Airport,
and Charles De Gaulle
Airport as well as at
warehouses around the
world, including Dubai and
Beijing.
Using WAERlinx, Schenker
provides customers realtime inventory visibility; a
single view identifies stock
owned by them in any
warehouse across the
globe, including both
serviceable and
unserviceable parts.
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information base for Sales & Operations Planning (S&OP).
The normal supply chain processes will run with minimal ‘bullwhip effect’ due
to the frequent alignment of orders with actual demand.
New product introductions will incur less risk when customer and supplier share
immediate visibility to actual demand during the early post-launch phase.
Exceptional demand will be handled better due to early-and-often
communication about upcoming special project work, promotions, etc.
(‘levelled’ production planning).
Key #7: Exploit the Power of Consignment
To truly maximise the VMI benefit, seriously consider the consignment model,
where the supplier retains ownership of inventory held at the customer’s
location, with the customer purchasing inventory as it is consumed.
While at first glance the consignment model may seem to burden the supplier,
it is really the essence of win-win VMI. Consignment frees up a very significant
amount of working capital for the customer, while the supplier retains complete
control over replenishment and is unencumbered by a traditional order cycle.
The intimate supply chain connection cements most-favoured status for the
supplier while providing visibility and predictability. For the customer, it ensures
optimum inventory performance at almost zero management burden and
minimal operating costs. It’s good strategically, tactically, and financially for
both parties: a classic win-win arrangement.
Summing Up the Win-Win Approach to Aerospace VMI
Transforming from a ‘push’ supply chain to a ‘pull’ approach creates the
opportunity for Aerospace manufacturers and suppliers to dramatically
streamline their operations and create stronger, mutually beneficial
relationships with long-term advantages.
By establishing direct vendor access to the demand signal, VMI provides more
responsiveness and efficiency without requiring tremendous amounts of
inventory to ensure service levels. The right products are continually pulled into
the right places at the right time with continuous replenishment at the point of
consumption.
Key success factors for VMI include regular demand/inventory level reviews,
tangible cost reduction goals, ‘favoured partner’ status, lowering the total order
count, bringing stakeholders together around a strategic vision, and
understanding where VMI can create an increase in sales volume. Most
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importantly of all, always consider the long-term synergies of the consignment
VMI model as the maximum win-win option.
For more information on how to implement a powerful and practical VMI
methodology across a global network of suppliers, OEMs, distributors, and
others, learn about the easy-to-implement, web-based solutions available from
Waer Systems.
© Copyright Waer Systems 2013
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Waer Systems specialises in the design, development and
implementation of flexible software solutions for organisations
with complex supply chain and reporting needs.
The company was established in 2000, initially to meet the need for
improved supply chain execution and warehouse management within the
global aerospace industry. Today, our innovative, elegant solutions deliver
increased process efficiency, optimised parts/asset management and realtime information flow to market leaders in a range of sectors.
Waer Systems Limited
Eight The Quadrant
Marlborough Road
Lancing, West Sussex
BN15 8UF
UK
Tel: +44 (0) 1903 768 010
Fax: +44 (0) 1903 768 022
[email protected]
Waer Systems France
Bureau de Toulouse - SBAC
5 Avenue Albert Durand
Aéroport Bâtiment 2
31700 Blagnac, Toulouse
France
Tel: 00 33 534 60 69 39
[email protected]
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