The traditional method of inventory management at a customer site is highly transaction oriented and provides little visibility into the inventory and demand position at the customer site, resulting in shortages in stock, increase in transactional and expediting costs.
What is Sell-side VMI?
At first, let’s understand what is Customer managed Inventory (also known as Sell side Vendor Managed Inventory) and its advantages.
Customer Managed Inventory (CMI in short) is a supply chain strategy where the customer manages the inventory levels of the products they purchase from a supplier, in order to have greater control over their inventory levels, while also reducing the supplier’s inventory costs and improving order fulfillment.
There are 2 variations of CMI typically in Business practice:
- Un-Consigned VMI with Customers
- Consigned VMI with Customers
Un-Consigned VMI with Customers
In this variation, the customer owns the inventory as soon as it is received at the customer site.
Goods are shipped from the supplier site to customer site using an external sales order, which will be used as triggering point by Supplier to invoice the customer.
Consigned VMI with Customers
In this variation, supplier will still keep ownership of the inventory, even after it has been received at the customer site. Whenever Customer consumes the Inventory, the Ownership transfer happens from the supplier site (owner) to customer, which will trigger the Invoice action.
Typically, in this case, Goods are shipped from the supplier site to the customer site using a Transfer Order or an internal sales order.
After consuming the Goods, the customer will communicate the usage via EDI or other means for invoicing. This will trigger consumption Sales Order which will process Inventory Consumption and Bill Only Orchestration flow to transfer the Stock ownership to the customer and generates invoice to the customer for the consumed stock.
Both the trading parties (Supplier and Customer) reaps benefits with this flow. Some of the key benefits include:
(1) Reduced Inventory Carrying Costs
By allowing the customer to manage their own stock levels, carrying cost of stock can be greatly reduced over time, as well as reduce the risk of shortages and over-stocking of required Goods.
(2) Improved Order Fulfillment Times
By providing real-time visibility into inventory levels and demand, businesses can improve order fulfillment times and reduce lead times.
(3) Increased Collaboration and Communication
An ERP system can facilitate collaboration between the trading partners, which helps to optimize inventory levels by ensuring the products are available in time for their needs.
(4) Better Data Insights
An ERP system can provide advanced data analytics capabilities, allowing businesses to analyze inventory levels, demand patterns, and other key metrics.
Role of ERP system in streamlining CMI process
Enterprise Resource Planning (ERP) systems are designed to integrate and streamline business processes, from finance and accounting to inventory management and customer relationship management (CRM). One area in which an ERP system can be particularly effective is in the management of customer managed inventory (CMI).
However, managing CMI can be complex, as it requires close collaboration between the customer and the supplier, as well as real-time visibility into inventory levels and demand. This is where an ERP system can play a critical role, by providing a centralized platform for managing CMI and facilitating communication and collaboration between the customer and the supplier.
What are Key features expected in ERP with regards to CMI?
There are several key features of an ERP system that are essential for managing CMI effectively. These include:
(1) Real-Time Inventory Visibility
An ERP system provides real-time visibility into inventory levels, allowing both the customer and the supplier to monitor inventory levels and demand.
(2) Collaborative Planning
An ERP System provides Planning functionality, which will help to build stronger relationships between the trading partners, and further improve performance of supply chain.
(3) Automated Ordering
An ERP system can automate the ordering process, based on pre-defined inventory levels and demand patterns. This can help to reduce the risk of stockouts and overstocks, as well as reduce the administrative burden associated with manual ordering.
(4) Data Analytics
An ERP system can provide advanced data analytics capabilities, allowing businesses to analyze inventory levels, demand patterns, and other key metrics. This can help to identify opportunities for improvement and optimize inventory levels over time.
Hypothetical case study: How ERP system helps Business leverage CMI?
To illustrate the benefits of an ERP system for managing CMI, let’s consider a hypothetical case study.
ABC Supplies is a supplier of industrial equipment to a variety of customers. One of their largest customers, XYZ Manufacturing, has expressed interest in implementing a CMI strategy, in order to reduce inventory carrying costs and improve order fulfillment times.
ABC Supplies decides to implement an ERP system to manage CMI with XYZ Manufacturing. The ERP system provides real-time visibility into inventory levels and demand, as well as facilitates collaborative planning and automated ordering.
Over time, the ERP system provides insights into demand patterns and inventory levels, allowing ABC supplies to optimize inventory levels and reduce the risk of stockouts and overstocks. This leads to significant cost savings, as well as improved order fulfillment times and increased customer satisfaction.
In addition, the ERP system facilitates communication and collaboration between ABC Supplies and XYZ Manufacturing, helping to build stronger relationships between the two parties and improve overall supply chain performance.
Solution Approach to achieve CMI in Oracle Fusion
As of version 23A, fusion does not provide a comprehensive solution in achieving CMI (also known as sell-side VMI). However, below is the solution approach in achieving the CMI with the standard functionalities available and with a bit of Add-on solution.
Several key steps are involved in the solution approach for achieving CMI in Oracle Fusion.
Step 1: The first step is for the client and the supplier to form a collaborative partnership. This relationship is crucial to CMI’s success since it necessitates a high level of trust and transparency between the two sides. The supplier must be open about their inventory levels, production plans, and lead times, while the customer must be open about their demand predictions and inventory requirements.
(a) Model the Organization: Assuming, the number of customers is not high, customer warehouse locations can be modelled as “Organizations” in Fusion.
(b) Model Consumption Transaction Type: An Inventory transaction type (for example “CMI Consumptions”) must be defined to identify inventory consumptions at customer site.
(c) Model Order Orchestration: In case of consigned VMI, specific order orchestration can be setup which will perform “Bill-only flow” upon “CMI consumption” advice from customer. In case of un-consigned VMI, another orchestration has to be defined which will follow regular order to cash flow.
Step 2: The second step is to put in place the infrastructure required to enable CMI. This entails setting the Oracle Fusion system to allow information sharing between the client and the provider. This can be accomplished by utilizing web services, APIs, or other integration technologies. The system must also be set up to handle automatic inventory replenishment based on consumer demand.
(a) Collaboration Platform: In case of real-time collaboration, customer may need to login to supplier systems to view the on-hand in real-time. This requires customer portal development for real-time collaboration with PaaS.
In case if real-time collaboration is not assumed between supplier and customer, the information may have to be exchanged on a daily basis via email or other means which best suits the customer needs.
(b) Consumption advice collaboration: In case of real-time collaboration, the consumption advice from customer can be modelled using an add-on screen functionality which performs the “CMI Consumption” transactions in CMI Organization.
In Other cases of collaboration, the consumption advice may have to be received from customer on a daily basis or supplier side may walk in to customer site to identify inventory movements/consumptions and register the consumption advice
In all cases, the consumption advice from the customer site needs to be interfaced to Oracle cloud via add-on functionality (screen or integration) via REST/web services.
Step 3: The third step is to define the rules and parameters for inventory management. Setting minimum and maximum inventory levels, safety stock levels, and reorder points are all part of this. To ensure that inventory levels are always optimal, these criteria must be based on accurate demand projections and production lead times.
(a) Modelling Planning Method: This requires identifying the planning method for customer organization. Business tends to go with Inventory Planning method using Min-Max planning. However, Forecast based planning based on anticipated future demands may also be used.
Step 4: The fourth step is to monitor inventory levels and make necessary adjustments. This entails tracking inventory levels in real time and applying analytics to determine demand trends and patterns. This data can be utilized to alter inventory levels, reorder points, and safety stock levels, ensuring that inventory is always available when it is needed.
(a) Modelling Analytics: Oracle fusion offers BIP and OTBI features to model analytics to visualize and monitor inventory levels. Prior to designing analytics, it is necessary to identify KPIs which are to be tracked. Some of the KPIs which are tracked includes Stockout rate, Inventory turnover ratio, Order Lead time, Carrying cost of inventory, etc.
Step 5: The final step is to keep improving the CMI process. This entails reviewing the CMI system’s performance and identifying opportunities for improvement. This can include increasing the accuracy of demand forecasting, reducing lead times, or optimizing inventory levels.
Conclusion
In Conclusion, enabling collaborative relationship between the trading partners (customer and supplier) by establishing the necessary infrastructure via an ERP, seasoned with necessary rules and parameters for governing and monitoring inventory levels, and continuously improving the process are all part of the solution approach for achieving CMI in Oracle Fusion. Customers can have greater control over their inventory levels by following these procedures, while also lowering supplier inventory costs and boosting order fulfillment.
