i2 U Intelligent Supply Chain Management Course Module Twelve: Inventory Deployment

© 2001 i2 Technologies Inc CONFIDENTIAL 2 Supply Chain Management Key Processes Sales & Operations Planning Demand Planning Inventory Planning Supplier Scheduling Production Scheduling Inventory Deployment Transportation Scheduling Demand Fulfillment Supply Chain Execution Monitoring Strategic Supply Chain Planning Master Supply Planning Procurement ProductionDistribution Transportation Impact of decisions _ + Number of decisions + _ Specificities by industries Length of Planning horizon Fully Integrated top-down directions Fully Integrated bottom-up feed back Reaction to changing supply conditions

© 2001 i2 Technologies Inc CONFIDENTIAL 3 After Completing This Module, You are Expected to: u Define the goals of the Inventory Deployment process u Understand the logic, objectives and limits of the Vendor Managed Inventory (VMI) approach for inventory deployment u Explain the benefits of a constraint-based VMI process u Understand the need to monitor a VMI process through a forecast consumption logic u Understand the logic of an auctioning process executed through an electronic marketplace u Identify Inventory Deployment key enablers and their resulting business value u Identify Inventory Deployment excellence criteria

© 2001 i2 Technologies Inc CONFIDENTIAL 4 Inventory Deployment Process Positioning hours days weeks months year + buy make move sell store operational tacticalstrategic scheduling

© 2001 i2 Technologies Inc CONFIDENTIAL 5 Inventory Deployment Process Goals u Ensure proper replenishment of inventories consumed or moved in the Supply Chain pipeline so as to respect inventory policies u In case of limited supply capabilities, ensure that inventory is deployed in priority to preferred channels / customers u Facilitate the replenishment process to customers by taking the responsibility for the replenishment process (VMI - Vendor Managed Inventory)

© 2001 i2 Technologies Inc CONFIDENTIAL 6 VMI Defined Company compares inventory level, safety stock level, expected consumption and in transit to generate replenishment orders 2 Customers send inventory and consumption information 1 3 Products are moved on the basis of the replenishment orders The customers receive the products without having placed any order! 4

© 2001 i2 Technologies Inc CONFIDENTIAL 7 VMI Typical Benefits Periodic Re-order Point System Vendor Managed Inventory Customer Inventory 0 Higher probability of stockouts (i.e., lost sales opportunities time Higher Inventory Level Lower Inventory Level Lower probability of stockouts Manufacturer Logistics & Supply Inventory Management Key Customer Handoffs between vendor and customer increases costs Manufacturer Logistics & Supply Through VMI Key Customer Consolidated inventory responsibility lowers costs

© 2001 i2 Technologies Inc CONFIDENTIAL 8 The Rise and Fall of VMI u 1980s: Development of stand-alone VMI software solutions u Retailers encourage their suppliers to become VMI suppliers (for obvious reasons!) u 1990s: VMI suppliers face a severe inventory increase to be able to support the process

© 2001 i2 Technologies Inc CONFIDENTIAL 9 The Problem With Stand-Alone VMI Solutions u Supply Chain constraints are not considered when replenishment orders are generated (assumes 100% product availability) u Inability to assign limited inventory quantities in priority to preferred customers

© 2001 i2 Technologies Inc CONFIDENTIAL 10 Gartner Group Assessment on VMI Evolution u “… unless VMI data is incorporated into the forecasting and planning loop, inventories and other costs may rise rather than fall when VMI is implemented ….” u “Lack of back-end integration is a prime reason that VMI firms fail to experience significant benefits.” u “Manufacturers can gain a competitive advantage from VMI in a number of ways, including integrating VMI information back into the planning stages, thus making manufacturing and deployment activities more efficient and increasing margins.” Beth Enslow, Gartner Research Note, 1999

© 2001 i2 Technologies Inc CONFIDENTIAL 11 Constraint-Based VMI Solution vs. Traditional Stand-Alone VMI u By simultaneously considering all inventory and capacity constraints, a constraint-based VMI solution DOES NOT ASSUME 100% Inventory Allocation. u By considering all possible alternates when inventory allocation from primary source is not 100%, a constraint-based VMI solution enables to maximize customer service.

© 2001 i2 Technologies Inc CONFIDENTIAL PERIOD FORECAST PROJECT.STOCK FUTURESUPPLY Phase 1: Definition of the consumption period Consumptionperiod VMI ORDER VMI Prerequisite: Monitoring Through Forecast Consumption (1/3)

© 2001 i2 Technologies Inc CONFIDENTIAL PERIOD FORECAST PROJECT.STOCK FUTURESUPPLY Phase 2: Consumption of the forecast by VMI generated replenishment orders Consumptionperiod VMI ORDER VMI Prerequisite: Monitoring Through Forecast Consumption (2/3)

© 2001 i2 Technologies Inc CONFIDENTIAL PERIOD FORECAST PROJECT.STOCK FUTURESUPPLY Phase 3: If the sum of the replenishment orders exceeds the remaining forecast, an alert is sent to the planner Consumptionperiod VMI ORDERS VMI Prerequisite: Monitoring through Forecast Consumption (3/3)

© 2001 i2 Technologies Inc CONFIDENTIAL 15 A New Perspective in Inventory Deployment Enabled by the Internet: Auction Management Customer cancels a large order 1 Company analyzes inventory projected balance on hand and identifies obsolescence or price erosion risk 2 Excess Stock is proposed through the Internet to a community of potential buyers with opening price and closing time 3 Buyers place their bids After closing time, the company sells the product to the highest bid 5

© 2001 i2 Technologies Inc CONFIDENTIAL 16 Inventory Deployment Process Excellence Criteria u Whenever possible, VMI processes are implemented with customers. u The quality of the data received by the customer is constantly monitored. Root cause of poor data quality is analyzed jointly with the customer. u VMI replenishments are based on adequate reorder point quantities, which are reviewed continuously. u VMI replenishment orders are generated taking into account supply limitations. The allocation rules are aligned with the company’s priorities. Customers are immediately notified of any short or late replenishment. u Electronic auctions are used whenever a short term decrease in demand generates a risk of inventory obsolescence or price erosion. u When customer deliveries are triggered by a VMI process, they are properly integrated with the standard order fulfillment process. In other words, ATP figures are consumed once a VMI replenishment order is released, and a monitoring/authorization process defines the steps required when a such an order generates a negative ATP figure.