Glossary Category: Supply Chain Management

Supply chain management is a critical element in managing your business. You need to understand and manage the risks associated with it.

The number one objective of buyers is usually to keep continuity of supply. Other common objectives are:

• Consistent quality
• Protection of intellectual property
• Avoidance of sudden price increases
• Access to specific competencies that help develop innovative products

Risks in a supply chain

There are four main factors that can influence risks in a supply chain:

1. Complexity – the number of steps (suppliers and sub-suppliers) involved in getting a product finished. The greater number of sub-suppliers involved, the greater the complexity and consequently, the more risk.
2. Customization – the more your product, and its components, are unique, the higher the risks. You might rely on one critical supplier because they are the only one who managed to do plating with the visual effect you wanted, for example.
3. Distance – do components come from different countries or across the world? Parts can be on a ship for weeks at a time and be subjected to customs inspections and delays, among others. The parts will be handled by multiple people and departments, each step increases the risk within the supply chain.
4. Sourcing destinations – some areas and countries come with their own risks. For example, your die casting factory in Shandong might get closed overnight because of a tighter anti-pollution policy. Or your Bangladesh factory subcontracted your goods to a workshop that catches fire (triggering a massive PR crisis for your company).

Two common challenges buyers face

1. Sub-suppliers’ identities are concealed – this often happens when a supplier wants to maintain control and handles all the sourcing of each component. This way you as a buyer are at risk as you have zero control over the quality of the components being purchased or manufactured by these third-party sub-suppliers.
2. Undisclosed subcontracting – you as a buyer may visit a factory and approve all the facility and agree to have your product manufactured there. However, while you are not there, the factory subcontracts out part or all your work without your knowledge and consent.

At Sofeast, we work closely with you to establish a known and trusted supply chain for your business where we can verify and manage each step of the manufacturing process.

For more information on how we can help you, contact us through our contact page.

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Supply chain management is a tightly linked topic to our webinar about the low-risk supply chain.

8 Elements of a Low-Risk Supply Chain in China

This FREE webinar will empower you to transform your supply chain in China to reduce risks. Two industry experts, Renaud Anjoran and Paul Adams from Sofeast, talk you through how to gain control over your product’s quality, on-time shipments, long-term pricing stability, and continuity of supply.

Ready to watch? Register by hitting the button below:

What is Vendor Managed Inventory (VMI)?

Vendor Managed Inventory or VMI is a collaboration between you and your suppliers where your suppliers manage the level of inventory based upon pre-arranged stock levels. The supplier is responsible for maintaining a set inventory level at the buyer’s (your) distribution locations.

In the traditional inventory control model, you, as the customer, would determine your necessary inventory levels, frequency of orders and the quantity of each order. Under a VMI model, you share your inventory level data with suppliers, and they agree to hold that amount of inventory at your disposal. (It means the responsibility of inventory control is passed to them.)

This way, the supplier can optimize production volumes and delivery strategies, and the customer needs less working capital and warehousing space. This ultimately aims at reducing costs for all parties.

What are the benefits of VMI?

VMI offers numerous benefits for both supplier and customer when it is appropriate and well planned. Here are some of the key benefits of this supply chain management practice:

More efficient inventory control and raw material handling for the supplier; this allows for reduced costs and the chance for the supplier to adopt a leaner approach to manufacturing.

Reduced risk of stock-outs and product shortages for the customer (for example, at the retail level). When products go out of stock, this is a direct loss of potential revenue. VMI provides sales data on seasonal trends, promotional effects, special offers and general day-to-day stock movement which allows the supplier to be in-tune with product demand.

Stronger buyer-supplier relationships may be built, which in turn allows both parties to become stronger and better in the business relationship (better communication, better new product introduction opportunities…).

Improved processes over time as the supplier will have input into your inventory management process as well as achieving more efficient ordering and accurate data between all parties.

Who is Vendor Managed Inventory for?

VMI is used by all kinds of businesses from restaurants, small retail shops, big box stores, oil companies and online retailers of all sizes. Walmart started using VMI back in the 1980s, which allowed them to become more efficient in their inventory control of thousands of items supplied by thousands of suppliers. The introduction of VMI since then has become more widespread as retailers are seeing the increased benefits.

If you are thinking of implementing VMI to your supply chain, there are several things to consider before jumping in headfirst.

How to implement VMI

In order to make VMI work, the implementation needs to be carefully planned out. Here are some guidelines that will help you implement yours (these are the best practices that we follow when setting up VMI):

1. Set expectations

VMI is a long-term strategy with best results being obtained over the longer period, make sure all parties involved fully understand the following:

• What each party can expect from implementing VMI?
• What timescales will be involved before benefits are likely to be seen?
• The amount of safety stock the supplier should be holding while the system is being matured?
• What needs to be done before implementation?

2. Communication

Clear communication is essential throughout the implementation of VMI and beyond. All parties need to communicate on a regular basis, the best way is to have a communication plan where all parties meet at scheduled times:

• Determine how data is communicated, again this is an essential element of VMI and must be as accurate as possible for VMI to work correctly.
• Never let communication from your side be the catalyst for failure.

3. Integrate systems wherever possible

Data transfer is one of the systems that should be automated. Manual data updates and transfer of spreadsheets can lead to errors and costly mistakes. Implementing an automated system removes most chances of errors.

You should also:

• Improve reliability of forecasting and continuously improve stock management and product delivery.

All these points will help you while planning the implementation of VMI. Remember, this is a long term strategy and not a quick win play. VMI needs to be implemented carefully. You can assume there will be issues along the way, but this is where clear communication is critical and all parties come to an agreement on moving forward.

Can Sofeast provide VMI?

Yes, we can set up VMI with your supplier/s as a part of our Value-Added Procurement Office in China solution if that’s something that your project requires. We will address this on a case-by-case basis.

If you need any help with implementing VMI, reach out to team to discuss in more detail.