Vendor managed inventory in SAP can help reduce the number of product-receiving processes that businesses are involved in and the potential room for error (e.g., seeking out a spot quote for supplies that exist in a company’s storage facilities but are not showing up in the inventory management system). When implemented correctly, businesses can eliminate excess inventory and run an even tighter supply chain.
The question for buyers arises: how can we integrate vendor (or supplier) managed inventory with our existing procurement systems to optimize it for success? Below we outline a guided process and highlight how businesses can implement a vendor managed inventory system in SAP.
Vendor managed inventory is a process often connected with Just in Time (JIT) Inventory and relies on vendors to arrange deliveries to maintain a certain stock level. In this case, risk is then shifted from the buyer to the vendor, since it is now their responsibility to forecast when a product will go below a supply target and restock before it hits the level at which they would be fined. Inventory is then replaced for the buyer without them having to initiate a purchase order. When you, the buyer, share your inventory with your vendor, they can determine the order size and frequency, removing the steps around purchase order creation and eliminating the amount of “rush” orders and overstock that occurs.
Ultimately, implementing vendor managed inventory in SAP results in a true partnership with mutual goals of efficiency and profitability. Selecting the right partner will result in greater vendor diversity, guaranteed on-time delivery and continual enhancements for cost savings and quality improvements.
With many apparent advantages, businesses must carefully consider whether this model is the most logical for their business goals and, if so, how they can implement this process in a way that will produce a Return of Investment (ROI).
Entering a vendor managed inventory relationship can be challenging without the right communication and collaboration guidelines. Following these best practices then becomes crucial for businesses to get started.
Any new processes must be founded on a clear set of business goals and outcomes. Since the relationship is designed to be mutually beneficial, both sides must agree on a set of goals that they are hoping to follow. Managing these goals will also require regularly scheduled reviews to ensure the program is still beneficial to both parties.
In general, vendor managed inventory considers lower-cost items that aren’t make or break for production assembly. By allocating space in the warehouse for these items, the cost of storing larger, more crucial items can be offset by the cost savings in other areas.
Vendor managed inventory is based on communication between buyers and vendors. Without accurate information on demand trends, vendors will not determine how much inventory to send or how often and as a result, overstocking, understocking and overall wasted efforts will ensue.
Unfortunately, among the top concerns for manufacturers today is the integration between their demand planning and inventory planning systems. Dashboards or operations planning suites can help businesses manage data as a single source of truth. Ensuring all databases are connected and talking to each other can help ensure the vendor provides the right information.
SAP cloud applications continue to mature and help businesses act as a central platform between two companies engaging in a vendor-managed inventory setup. This central point can create better visibility and communication throughout the relationship.
Since this type of relationship requires greater data integration between both parties, businesses will be required to share more information about inventory levels and seasonal specific information. As more data becomes known to the vendor, businesses face greater risks of information breaches. Therefore, proper confidentiality agreements should be created early on.
Traditionally, organizations have provided ample historical data to help their vendors estimate how much a given product needs delivery. Instead of depending on just the historical demand, the most successful organizations will look at future forecasts as well. When used with a vendor management solution, this data can create a better picture of replenishment needs and help businesses adapt accordingly.
Vendor managed inventory in SAP greatly helps mitigate the bullwhip effect in more ways than just shifting pressure to the vendor. Rather, it comes down to mutual trust in sharing data. One of the major disadvantages of vendor-managed inventory is that non-employees will need access to your inventory data and, at times, your inventory. Therefore, the ConvergentIS Operational Procurement Portal coupled with SAP Ariba Supply Chain Collaboration can be a great solution for medium to large-sized companies to ensure your business is accurately managing data. Partner applications can be leveraged for small to mid-sized businesses.
By bringing together data across all points and creating a source for two-way communication, businesses are well-positioned to take advantage of the benefits of vendor managed inventory.