Deciding between VMI and Delivery Schedule
Tango or Cha Cha?
In the world of Advanced Customer Order Management, where the customer wants to go Purchase Order-free, one important decision is whether to go for a Vendor Managed Inventory (VMI) approach or rather a Delivery Schedule (DelSched) approach. In both approaches, the customer doesn’t want to send you POs, but the use of the proper tool to manage the inventory flow to the customer is an important decision.
I had an interesting conversation on this topic at Elemica’s recent IGNITE supply chain conference in Philadelphia. The conversation was with a client who will remain unnamed, but it’s a household name company and it has actually created a lot of the activity in the Process Industry market around the VMI and DelSched topics – so that client’s input on this issue was definitely of interest.
Talking with the client, I learned a piece of important history that I hadn’t really thought about before. It turns out that this client’s interest in driving VMI and Delivery Schedule programs among its suppliers was due to the pressure that the client had received several years earlier from its largest customers; to manage inventories more tightly and use more integration and automation to drive the process. Those customers were the big-box national retailers: Wal-Mart, Home Depot and the like – and they had the market clout to drive these changes through several layers of suppliers.
So the key question was, in pushing a PO-free automated approach to suppliers, “How do you decide between VMI and Delivery Schedule for each supplier?”
This particular client’s answer was very simple – “It depends on the maturity of the supplier’s supply chain.” For suppliers with more robust, mature supply chains, supply chains further up on Gartner’s Supply Chain Maturity Curve, for instance; the client would recommend full VMI. For suppliers with less mature – not to say more chaotic supply chains – the client would promote Delivery Schedule.
Which makes a lot of sense – the more you think about it. More robust, mature supply chains are more flexible; more able to adapt to market demand signals; more able to ebb and flow along with the customer’s demand. They are better able to flex production, swap products in and out of supply depending on the customer’s needs, than producers with less sophisticated supply chains. Indeed, these are the very metrics (flexibility in production and distribution, adaptability to demand signals, level of automation) that Gartner uses to define a more mature supply chain.
As the client said, for suppliers with less mature supply chains, “They’ve got enough problems as it is” – without introducing a sophisticated true VMI solution and all its complexity. About the best these suppliers can hope for is to be able to manage to a customer’s production schedule or delivery schedule – the way it works in a Delivery Schedule approach. In that scenario, the supplier receives a mix of Firm orders and Planned orders over a one-month horizon, for instance, and the supplier has to apply a number of agreed-to business rules (i.e., transportation lead times for each location and product, minimum and maximum shipment quantities, freeze period, and so on) to convert the demand stream into today’s and this week’s firm orders and shipments.
For Elemica clients, we can help you no matter what kind of supplier you are – VMI or Delivery Schedule. We offer robust, tried-and-true solutions for each of these environments – which turn VMI information or DelSched data into a stream of Order Creates, Order Changes, and Order Cancels for your ERP system. We’ve got you covered either way, but it is interesting to hear the rationale from at least one customer as to how they make the decision between the two approaches for each of their suppliers.
It takes two to tango, and it also takes two to cha-cha! The “dance” that you choose often depends a lot on the capabilities of your dance partner.