Latest trend in high-tech Supply Chain

It is really exciting to learn that US market is already showing an upward trend in demand. However an extremely conservative supply chain design by managers running the show is not allowing the complete benefits to be realized. 

Here is an interesting article in Wall Stree Journal where Phred Dvorak documents how Best Buy is unable to support the entire demand because of inadequate supply by the equipment manufacturers.

http://online.wsj.com/article/SB124260855682928885.html 

Comments are welcome!

Vendor Managed Inventory: How long do we need this?

Vendor Managed Inventory (VMI) or Supplier Managed Inventory is one of the several business models that have been made popular by Walmart since it asked P&G to provide this service at it's distribution centers all across US. Just to make sure we are in the same page, here is a definition of VMI* (It is a family of business models in which the buyer of a product provides certain information to a supplier of that product and the supplier takes full responsibility for maintaining an agreed inventory of the material, usually at the buyer's consumption location (usually a warehouse or a DC). It is often described as a symbiotic relationship where both vendor/supplier (Procter & Gamble) and the buyer (Walmart) have something to gain from it. From a buyer (Often a retailer, but can be a Contract manufacturer) perspective, the values are rather obvious. It relinquishes the responsibility of managing the inventory at DC, cutting PO and worrying about the entire process of making sure that the desired items are available for sales or consumption. Does this come free to it! Often times it has to commit to sharing all the market insights (Forecast collaboration) of the demand to it's vendor. Of course it looses any direct control over the inventory to it's suppliers. 

Supplier in turn gets to plan the inventory based on perfect visibility to actual demand and it's own production capacity. The big "value" comes from the fact that supplier having visibility to both demand (through forecast collaboration) and supply (of it's own manufacturing capacity) can do a better job of planning the inventory than the Retailer itself. Hence the supplier having better access to all the relevant information both at demand and supply side, can manage the process optimally with lesser inventory compared to the retailer. Hence the "value" boils down to the supply chain visibility (i.e. information) that allows optimal decision making and consequently a more efficient supply chain. Now if all those desired information (i.e. visibility) is made available to the Retailer, can it get the job done with equal efficiency? I am always intrigued by this last question and would like to explore it a little bit here.

In the present environment it is rather foolish to assume that "All" the relevant information of the vendor will be available to the retailer. The existing relationship between trading partners does not allow this kind of collaboration. This is because the retailer than can use the information to its own advantage at the expense of the vendor. Since the vendors are already aware of this possibility they are unlikely to provide all the details necessary for the retailer to make the best possible decision. Both parties in fact are aware of this reality and hence we have VMI. 

Does a firm like Toyota having an excellent reputation for developing trust based relationships, need this sort of model? May be not! When businesses worldwide would improve their processes to the extent that VMI would be considered redundant, than it would be safe to assume that we have reached the pinnacle of collaboration in our extended supply chain. Until than VMI is going to stay with us.

* Note: Click here for the Wikipedia site for VMI. 

Comments are welcome!
Print this Article

What exactly is "Pull" type inventory planning?

It has been years since I read the notion of a 'Pull' type planning where a manufacturer do not  build any inventory and wait for a customer order to start its process. However it is also true that in several instances this is not possible, because customer is not going to wait through your lead time for the product to show up. What does this mean? Does it mean that the pull technique is ONLY applicable for a "make to order" environment! If this is the case, than even Toyota do not seem to be following it. One can visit any Toyota dealer in US to see several cars readily available for the customers. Does it mean that they do not practice what they preach? I had this question for years before I found the answer recently and here is how I see it now. 

It is important to bring a nice historical perspective to the Toyota story. As the story goes, manager's from Toyota came to US to learn about Auto industry. What they noticed in Ford did not exactly impressed them! However they were fascinated by a Wrigley grocery store where they would stock a few items in the isle based on historical consumption (aka actual demand) and replenish them whenever those isles are empty. The inventory were often minimal and based on exact demand. 

The management of inventory planning process at Wrigley happened to be the key motivator for Toyota. They created the pull based system by storing just a minimum inventory at each desired location. The amount was based not on any forecast, but on actual consumption of those items. The replenishment order was initiated not based on any pre-determined schedule, but on actual drop in inventory below the set level. This inventory was aptly called the "Supermarket" in the language of lean. As the inventory was pulled by customers, replenishment orders (Work order or Purchase order) were placed on the downstream suppliers. And this is how a pull based planning can be made functional even in a "make to stock" environment. 

So pulling does not mean a "make to stock" or a "make to order" planning; it means the ability to set the inventory based on actual demand (measured by historical consumption) and not on any forecast. It also means that the replenishment (production or purchase) is based not on any schedule, but on actual need for the inventory to support the demand. Forecast is no-longer used to guide the production process. 

But can it be true when future is very different from past!! If you have a very strong reason to believe that forecast is going to be true, than use it (instead) to set the inventory. This can happen when a customer indicates about a large order in advance. So inventory is usually set based on actual demand; however it can also be set at a higher/lower level when the planners have strong reason to believe that the forecast is going to be true!

Additionally, in order to take care of the uncertainty we add a "safety stock" component to the inventory. This is also calculated using the historical actual demand data.  

Comments are welcome!
Print this Article