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01 INTRODUCTION
05
10 CRITICAL SIGNS YOU NEED A VENDOR
MANAGED INVENTORY
01 INTRODUCTION
Youre tired.
Tired of having to source, process, and chase high consumption and routine expendable and
consumable material.
You put too much time, money and effort into getting what you need when you need it.
In a perfect world, this material would automatically replenish itself on your shelves, as you need it.
In the following pages, well talk about vendor managed inventory, how it can relieve many of your
expendable and consumable pains, dramatically reduce your total costs and regain hours of
productivity or simply more time with your family.
Its a great strategy and if you're an airline, MRO, or military who consumes a high volume of
expendable and consumables, this guide is for you.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
Will a vendor consignment or a vendor managed inventory, VMI be the best option for your
aircraft material needs?
These terms get thrown around interchangeably, but theyre different. We wouldnt call a zebra a lion
now would we?
A VMI is when your vendor is managing the supply of your inventory. Whereas, a consignment
relates to the ownership of the inventory. Neither of them is dependent on one another.
You can have a VMI that is not a consignment inventory, you can have a consignment thats not a VMI,
and you can have inventory that is both a VMI and consignment.
"Vendor-managed inventory (VMI) is a family of business models in which the buyer of a product
(business) provides certain information to a vendor (supply chain) supplier of that product and the
supplier takes full responsibility for maintaining an agreed inventory of the material, usually at the
buyers consumption location (usually a store). A third-party logistics provider can also be involved to
make sure that the buyer has the required level of inventory by adjusting the demand and supply
gaps. Vendor-Managed Inventory (VMI) is a planning and management system that is not directly tied
to inventory ownership.
Lets say you need 500 high demand consumables, in stock, at all times.
It gets really difficult to source, process, and chase these items every time your inventory runs
low or is depleted.
At Skylink, we make this process as simple as possible for our customers. You and a Dedicated
Account Manager, would come up with a predetermined forecast for your material needs. A minimum
stock level would be set and an initial provision would be sent to you. Once you hit your minimum
stock level, an automatic replenishment would be sent by Skylink.
Overtime, Skylink monitors your consumption patterns and adjusts your stock levels.
With this example, Skylink manages the supply of your inventory. Once its at one of your
facilities, you own the material.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
BENEFITS OF VMI
Based on the journal; The comparative study of consignment and vendor managed inventory
with special reference of cost structure, Poonam Lakra outlines 4 key benefits to a VMI:
1. Improved customer service. By receiving timely information directly from cash registers,
suppliers can better respond to customers inventory needs in terms of both quantity and location.
3. Reduced inventory requirements. By knowing exactly how much inventory the customer is
carrying, a suppliers own inventory requirements are reduced since the need for excess stock to
buffer against uncertainty is reduced or eliminated.
4. Reduced costs. To mitigate the up-front costs that VMI demands, Fox suggests that
manufacturers reduce costs by re-engineering and merging their order fulfillment and distribution
center replenishment activities.
Youre spending too much time and money sourcing, processing and chasing orders. Youre
constantly out of stock for high usage material, or youre overstocked, unnecessarily tying up capital
in poorly planned inventory.
A simplified example would be if Skylink stored 100 high usage items at your facility. You would be
billed as the items were consumed.
The consignment inventory model is most effective with service parts for critical equipment where
you would not stock certain service parts due to budget constraints or demand uncertainty. The
consignment inventory will allow your supplier to provide a higher service level (by having the parts
immediately available) and save expedited processing and freight costs.
A WORD OF CAUTION ABOUT VENDOR CONSIGNMENT
A consignment inventory should not be used just as a localized cost-cutting tactic. Don't pressure
your supplier into providing consignment inventory to eliminate your investment in inventory.
While this may reduce your costs, its just moving these costs from you to the supplier. A
consignment inventory will add these costs to the supply chain. Theres always additional costs
associated with managing the consignment process. The supply chain will have to absorb more costs
without any meaningful benefit and youll eventually pay for it. Be careful!
Now you know the differences between a vendor consignment and VMI inventory strategy. Youve
read the benefits and the downfalls. Now what?
Because aircraft expendable and consumable unit prices are low, they often get little attention and
50% of what is purchased is never used and wasted. When you ship these parts under critical / AOG
time frames, it costs five times as much as routine parts shipments.
You spend time sourcing, processing, and chasing these orders, but the total cost mindset is
forgotten. You focus a lot of your energy on the unit price. Its cheap, so you forget the costs of
processing, shipping and storing the material.
If you spend $1,000,000 a year on aircraft expendables and consumables and waste 50%,
$500,000 is wasted. Even if you waste only 10%, its still $100,000 that didnt need to be wasted.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
MROs
MROs have a huge burden as well. This is true for private, conglomerate, and airline MROs.
Their pain is the locked value of spare parts and other MRO inventory sitting on shelves. On average,
an MRO has the equivalent of between 2 - 5 percent of annual sales tied up in unused--often
never used--inventory.
CONTROL YOUR AIRCRAFT EXPENDABLE & CONSUMABLE CONSUMPTION
Dont panic. Despite these statistics, things get better. Its about taking the time to step back and look
at the big picture. Where are your biggest issues? Where do you need help? Answer those questions and
start brainstorming.
When it comes to aircraft expendables and consumables,
there are 3 strategies that will make your aviation life
much easier, and they have the potential to save you a ton
of time and money on inventory.
Maintenance check kitting can be used for line maintenance, A - D checks, modifications, standard
RFQs of 10 - 1,000 parts, and any other maintenance projects you experience.
Once your inventory is established and as you consume the material, theyll automatically send you
replenishment inventory. Youll never have to cut or chase another PO.
You can downsize your warehouse space, reduce your holding costs, and eliminate processing costs.
Its a great expendable strategy if you have the consumption history.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
3. CONSIGNMENT
When you consign inventory, your trusted material partner will store their inventory at your
facility. You'll then be invoiced only when you consume it.
The consignment option is great when you have consumption history and your partner can create an
accurate demand forecast. Once the consignment is set, youll pull from their inventory when you
need a component.
The brutal truth is, expendable inventory is expensive. It doesn't matter if the unit price is $.10
or $100, it all adds up to significant waste. Review your current strategy, note your issues, discuss a
better way, and adopt a total cost mindset. It'll save you a ton of time and money.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
You madly process POs. One PO after the next. 1, 3, 150 POs sent every day. This is all you do. Source,
process, chase, and repeat. It must get done, but
Each time you cut a purchase order you spend between $50 - $200 in processing costs.
Calculating the cost of a purchase order gives you a high-level look at your processing habits and
how much they cost you. And its a great I-know-what-Im-talking-about
conversation starter with your CFO. Try it.
Once you no longer focus just on direct price, youll begin to see that all of your actions have a
reaction.
Each operation is different when it comes to calculating their PO costs. Theres a lot of best practice
theories. Just like everything else. Theyll tell you to calculate all of the salaries for those who deal
with processing POs and divide it by the amount of POs processed in the given period.
There are many ways to debunk this calculation. The best place to start is for you to concentrate
on how you can reduce duplication. Not just inside your company, but eliminate it throughout your
entire supply chain.
Now, this doesnt mean ignore all variable costs. Some operations will want to factor those into their
calculation as well.
When you begin to calculate your cost, take a dive into your fixed and variable costs. If it makes
sense, add them into your calculation.
VARIABLE COSTS
Now, take a brief look at your variable costs:
How many times do you have to follow-up with a supplier
Telephone and internet charges
Physical goods like paper, pens and other office supplies
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
Once you have your cost, its time to think of how you can reduce, or better yet, eliminate these
costs.
You now know what your processing costs are. What are you going to do about it?
One of the single biggest strategies you can adopt is a vendor managed inventory for your high
usage expendables and consumables.
But let's shed some light on what this means for you.
1. Depending on the volume of POs you cut, expect to cut your processing cost by at least 50%.
Getting started with a vendor managed inventory solution is really simple. Just read this post
and begin compiling your high usage material list.
But the real issue is what are you going to do about it? A vendor managed inventory is a solution
that will resolve a lot of your time and cost problems. And, its easy to implement. But first, lets
understand some of the issues itll help you resolve.
1. YOU SPEND A TONOF TIME PROCESSING ORDERS
Every time you cut a PO you spend between $50 - $200 just to process the PO. Just think. How many
POs do you cut a week? 10, 15, 200?
Im not sure whats worse than that, but if youre cutting 200 POs then youre also sending out a ton of
RFQs. After you source, chase, and process, your purchasing teams time has been dried up. Theres
no room for flexibility.
A vendor managed inventory solution will dramatically cut your sourcing and processing costs.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
Have you purchased 10 aircraft parts from 10 different companies? Are you often confused on how to
process a list of 150 expendables and consumables?
With millions of components and unlimited options of suppliers, sourcing, processing, and
tracking orders is time-consuming.The goal for any procurement operation is to efficiently procure
material from the right source and to get it at the right time.
If the procurement team is blindly ordering, operating costs will be on the rise.
Using a vendor managed inventory will help you create an efficient supply chain. With auto-
replenishment, you won't have to process or chase POs. Time and money are saved instantly.
With a vendor managed inventory youll only have what you need for near-term demands. As
you consume this material your trusted advisor will automatically send replacement inventory. All
you have to do is take receipt of these goods and begin consuming.
Theres no more reason to stock material you wont use or to stock anything at all without a
trusted advisors support.Reduce your inventory burden and let a VMI solution do the heavy lifting
for your expendables and consumables.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
Do you purchase the same aircraft material regularly? With processing and shipping being a real
cost, it makes sense to automate this process. This goes for both rotables and expendables. You
know you have a need, you know what part you need--so automate it.
With a vendor managed inventory solution, as you consume material your trusted material advisor
will be alerted and theyll send you replenishment stock.
With a VMI solution, youll get a Dedicated Account Management (DAM) team. Youll know
exactly what and when youll get certain material. Theres no need to chase or expedite orders. Its
all taken care of for you.
With a VMI solution, your replenishment inventory is consolidated and shippedeven with
other orders that fall outside of the VMI. This saves money on freight. It also reduces your need to
express ship small parcel or AOG ship urgent expendables.
Do you purchase material to cover what you think" you need? This is a huge waste of capital and
gives you no data on consumption patterns. This is anything but predictable.
With a VMI solution, a forecast is modeled and revised over time. Youll see what youre consuming
and when. Youll see what items need more coverage and what items need less. Youll have an up to
date inventory cost and youll also be able to see what you will need in the near future for
replenishment. Youll see exactly what you need and the money tied to it.
9. YOUR POINT OF CONTACT IS A ROBOT OR INHUMAN
This is a controversial one. Theres nothing more frustrating, from a procurement standpoint
than having to dial an 800 number and speak to someone youve never talked with before.
Where's the trust in that? Especially when youre AOG. Relationships are built on trust and no website
or 800 number can deliver on the human side of our procurement world.
With a VMI solution, youll get a 24/7 Dedicated Account Manager. They are your go-to resource
for anything you need.Theres also a dedicated team behind them to manage your forecast, ensure
material meets your replenishment timeline and help with any issues that may arise.
A VMI solution will resolve many of your procurement issues. The first step is to look at this list
and really see what issues you deal with. Which ones resonate with you? The next step is to
discuss this with a trusted material advisor and begin resolving them with a VMI solution.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
You purchase and own the inventory, regardless of whether you sell it.
You have limited visibility into whether your suppliers can even fulfill your order.
Thats where vendor managed inventory plays an important role
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
The goal is to make sure you only buy what youll use. Youll maintain close contact with your
aircraft material partner, through technology, so that you purchase stock in smaller batches, more
frequently and automatically. As you begin to receive stock in smaller batches, the burden of
inventory management is shifted from you to your material partner, who is pushing inventory to you,
based on real-time demand.
Instead of forecasting yearly maintenance projects, or last minute requisitions, and buying a bunch of
expendables to ensure your maintenance projects will go as planned, youll be in constant
communication with your material partner. You'll constantly push your inventory counts to your
material partner, who will constantly maintain your inventory, making frequent and smaller
shipments.
The vendor managed inventory is usually handled through modern technology. This technology is
called EDI (electronic data interchange) and it hooks up with your suppliers ERP system.
Now, that you have the overview of what VMI is, lets see if the benefits are right for you.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
COST BENEFITS
VMI buries its head deep into your supply chain and
allows your supplier to better optimize the planning
and replenishment processes. Through this, you get
improved visibility and control of the total order
planning and execution steps. Remember the days
when you received a requisition order, you cut 13 POs
and then had to process and track all the POs?
The VMI approach is about a close partnership and because of this, your supplier is responsible for
replenishing stock. This includes ordering the inventory, managing the logistics to ship the material,
and counting the inventory. Since youll be passing on tasks that would normally be done by you,
youll see an overall reduction in your inventory costs and youll have the opportunity to reinvest
that capital into other parts of your operation.
Because this is all forecasted, youll pull in inventory needed to meet your maintenance project
demands, eliminating minimum order quantities. Your supplier may choose to replenish the VMI
inventory based on predetermined minimum order quantities internal to their company, but that
doesnt concern you. The inventory liability largely resides with the supplier and they have more
of an incentive to eliminate unneeded inventory and costs into the supply chain.
Most people see inventory as a bad thing but in reality, without it, you cant do your job effectively.
The inventory in a VMI program is often an asset worth investing in because it decouples upstream
and downstream supply chain partners from random order fluctuations, forecast inaccuracies,
and other variations in demand and supply. Inventory in a VMI program can be positioned at the
best place for quicklyresponding to variations in the supply chain and removes the need for each
supply chain node to maintain their own buffer of inventory.
This can significantly reduce the overall supply chain inventory and the associated costs of
maintaining such inventory.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
DELIVERY BENEFITS
By having the inventory on-site or near you, it enables
you to pull inventory quickly and efficiently based on
your maintenance needs, reducing lead-times to zero.
VMI helps to compensate for the lack of system integration between supply chain partners by
allowing inventory to reside within the suppliers ERP system until pulled by you. By keeping
inventory within the suppliers system, it provides a more accurate input into the material
requirement planning process, as well as provides a more accurate demand history that can be
diluted by minimum order quantities and other planning variables. This enables your supplier to
more accurately predict your demand and improve delivery performance.
Since inventory is near you, VMI provides a more reliable mechanism for delivery compared to
traditional ordering approaches such as discrete POs. By providing a reliable delivery mechanism,
VMI removes variability from the delivery process and allows you to improve the delivery of your
maintenance projects.
QUALITY BENEFITS
VMI facilitates a pull-based approach that helps prevent excess inventory from being pushed
into your supply chain. By reducing the inventory levels within the supply chain, it drives both you
and your supplier to quickly identify quality issues in the material because youre using the inventory
close to real-time instead of future maintenance projects. Theres no excess inventory available in
the channel to allow maintenance to continue, which traditionally helps mask quality issues.
VMI also promotes a quality conscious culture because the inventory resides on the suppliers books
until pulled by you. Whether people like to admit it or not, a supplier will be more responsive in
addressing and resolving a quality issue if the inventory is on their books. Its a cold hard fact.
When most supply chain professionals discuss VMI, they often quote the
benefits as it relates directly to their company. Although these benefits are
valid and provide great value to a company, the true significance is often
overlooked with this narrowly focused view. The real benefits of VMI
relate to driving a lean supply chain that is centered on creating an
end-to-end pull system, based on end user demand that cascades
through the supply chain.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
Its a mess. Youre frustrated that time and money have been wasted. All you want is for the craziness
to stop. You want to stock the things you need and plan for the rest.
What you need is vendor managed inventory. Its an aircraft expendable dream. Have what you
want and only consume what you need. Once you hit a minimum stock level, an automatic shipment
of replacements is sent to you. Easy!
During the initial phases of implementation, you and the supplier should clearly outline your
expectations and performance metrics.
You should understand each others business model and company visions. Its important to gain this
level of understanding in the early stages so that both companies are working towards one common
goal.
Do I have a partner, who I know and trust, with a vendor managed inventory?
Youre ready to take the plunge into the deep dark vortex of proper aircraft inventory management.
You dont want to spend so much time dealing with aircraft expendables. You want what you need
now--no more, no less.
First, you must be committed to solving your expendable problems. Once you are, the rest is easy.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
The best option you have is to run a simple consumption report for the past two years. Ideally,
breaking this down into monthly consumption will provide the most accurate data in further steps.
Itll help your supplier narrow in on the safety stock and reorder points with more effectiveness.
Its important to have a consumption report. If you dont then we can determine the items you
need based on OEM data, known events, and unknown events, but this will take you a lot more time.
Once you have your consumption report, have maintenance review it. They may have hangar floor
insight that you could use when building your vendor managed inventory list.
Dont worry. This wont be perfect starting off.Your vendor managed inventory will be properly
monitored over time, and improved with adjustments as your demand pattern shows trends.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
From here, it's up to your supplier. You need to get them the items you want to be covered and the
consumption and theyll do the rest.
Theyll look into your consumption habits and set an initial allocation quantity. This will be your
recommended stock quantity. They'll pull this information from your past consumption data. Their
goal is to get each line item into a daily consumption statistic.
Theyll set your allocation quantity based on daily usage and maintenance consumption
recommendations.
Your supplier will then begin running more detailed statistics. Dont worry, its not too complicated.
They dont need a Ph.D. in math. They just need a brain and a spreadsheet.
When Skylink begins doing these calculations, we stress that you try to have a monthly
consumption report. Itll help your supplier determine your daily requirements and forecast a more
accurate reorder point.
Your partner will use a standard deviation, service level, and lead time factor to determine what
your safety stock should be. If you only have a yearly consumption, your standard deviation will be
the same for all part numbers. Over time, your supplier will correct this by watching your
consumption habits.
The final step for you and your supplier is to watch your
consumption habits. Anytime you hit a reorder point (or
minimum inventory), replacements will be sent to you in the
form of your allocation quantity.
THE ULTIMATE GUIDE TO VENDOR MANAGED INVENTORY
Over time, your supplier may increase or decrease your reorder point based on the
trends they see. Remember, if you dont have detailed consumption reports
starting out, thats okay. Itll take your supplier some time to learn about your
consumption habits. This is very important to remember so you do not think they can
create a perfect model with very little information. Remember, theyre not Harry
Potter.
These steps will get you moving in the right direction to a stress-free expendable
life organized by a Vendor Managed Inventory strategy.