SEVEN KEYS TO WIN- WIN VMI PARTNERSHIPS FOR AEROSPACE COMPANIES

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1 SEVEN KEYS TO WIN- WIN VMI PARTNERSHIPS FOR AEROSPACE COMPANIES Getting from push to pull using vendor-managed inventory. WHITE PAPER Andy Bergin / V4 / Apr 2012 Waer Systems Limited

2 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. 2

3 Seven Keys to Successful Vendor- Managed 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. 3

4 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. 4

5 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 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 5

6 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 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. 6

7 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 7

8 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. 8

9 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) Fax: +44 (0) infoeurope@waersystems.com Waer Systems France Bureau de Toulouse - SBAC 5 Avenue Albert Durand Aéroport Bâtiment Blagnac, Toulouse France Tel: infoeurope@waersystems.com 9