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CASE STUDY: VMI Solution for OEM
How one manufacturer (XYZ Inc) solved the problem of excess & inactive inventory and increased efficiency to meet challenges of expansion and relocation through a vendor managed inventory solution.
Four years ago, the subject of this case study, (we’ll call them XYZ Inc) was in the midst of executing a significant acquisition strategy, which culminated in the closure of multiple newly acquired manufacturing sites and the consolidation of key assets. The firm was moving into an expanding manufacturing campus in the Northeast and the materials management team was not only challenged to plan and execute production of an explosion of new platforms but also constrained by several business issues:
- Working Capital Crunch
- Excess / Obsolete Inventory
- Stockouts / Late Deliveries
- Cost of Components
- Warehouse Space
- Overhead Hiring Freeze
- Direct Labor on Indirect Tasks
- Too Many Suppliers
Our subject, XYZ Inc., faced the following immediate needs:
1. Material Handling Resources to unload trailer trucks of goods from the shuttered acquired facilities, build storage racks, and receive goods into their enterprise resource planning (ERP).
2. Buyers/Planners/Expeditors to assist XYZ Inc’s plan, purchase, and expedite components in support of evolving production requirements. Several of the original on-site iPower personnel were converted to fulltime XYZ Inc employees.
3. A Unified VMI Process to simplify material flow, clarify roles and responsibility, and improve spend visibility and control of the rapidly expanding population of expense items.
The XYZ Inc’s Management team accepted the iPower Vendor Consolidation/VMI Proposal for three important reasons.
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First, iPower’s experience building and managing 2 Bin Pull Systems was a strategic fit to the direction XYZ Inc was pushing its manufacturing environment.
Second, iPower had a proven plan to consolidate vendors, aggregate spend, drive down purchase price, and provide consolidated invoices to optimize discount capture.
Third, iPower’s technology and business processes ensured existing inventory would be burned down before any new material could be purchased.
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The Implementation
iPower dismantled several centralized free issue inventory locations in a phased approach and integrated the free issue inventory into a 2 Bin Pull System at Point of Use within the new manufacturing cells as they emerged. This had several major benefits. It eliminated direct laborers expending time on indirect activities (i.e. searching for components) and increased dramatically the availability of active components, choked out inactive inventory, and burned down excess inventories.
Within the first year, iPower was driving implementations in several production facilities and turning inventories at an average rate of 15 times. Over the next two years, the VMI spend began to ramp as locations were built and inventory was burnt:
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• Year One:
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$17,000 |
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• Year Two:
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$992,148 |
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• Year Three:
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$1,056,340 |
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• Year Four:
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$2,366,389 |
VMI Savings
Based on an annual spend of $2MM we provided a 13% cost savings as follows:
Carrying Cost (Using the REM Model)
Inventory Turns from 3 -12 times
Physical Handling
Clerical & Inventory Control
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$125,000
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Price Savings
Vendor Consolidation
Eliminated Stock Outs
Increased Quality
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$120,000 to $150,000
20+
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VMI Program Fast Facts:
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Current Dollar Spend:
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$3,148,000
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15 High Level Commodities Covered:
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- Adhesives
- Electrical
- Ind. Supplies
- Springs
- Bearings
- Electronics
- Lubricants
- Tubing
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- Cables/Cable assemblies
- Fasteners
- O-Rings
- Wire
- Clean room/safety supplies
- Fittings
- Identification Products
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Unique Part Numbers
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6,218
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| Production locations |
10,829 |
| POs |
3,483 |
| PO Lines Shipped |
21,679 |
| Parts Shipped |
10,236,075 |
| Quality |
99.99 |
| Consolidated Invoices |
12 |
| iPower Onsite Resources |
2 1/2 full time professional resources |
Growth through Mutual Benefit
The program has been successful because it solved the business problems originally encountered by XYZ Inc. It grew in both part number count and total spend in the last couple of years because iPower has taken on the parts and/or commodities that were problematic to XYZ Inc. In most cases each new opportunity shared one or more of the following characteristics:
- Missed Delivery Dates
- Space constraints
- Frequent Stockouts
- Excess Inventory /Safety Stocks
- Currently Being Purchased Direct from Manufacturer by XYZ Inc.
The program grew because iPower’s specialized supply chain used its technical expertise, working capital, and willingness to focus on XYZ Inc’s business requirements to prove it could provide XYZ Inc with a broad spectrum of products that met its stringent product specifications. The vast majority of the 10 million items passing through the iPower VMI are components used in XYZ Inc’s end products.
The iPower VMI not only provides quality products in the right quantities at the right times to the right places but also provides sound inventory and business management for those commodities and components left in its care.
The iPower Distribution Group Commitment:
We ensure the member’s Major Inventory Investment (in standard and special items) to support five-day turnaround requirements for your VMI and Kan Ban is balanced to meet your needs without exposing either the Member or XYZ Inc to excess inventory.
We ensure the Optimum Level of Floor stock is maintained on XYZ Inc production floor buy adjusting Bin Quantities and ROP/ROQ (for those items not managed through the 2 bin system) to match production ramps, reductions, and outsourcing initiatives.
We conduct Monthly Onsite Cost Reduction Team Meetings to ensure new ideas and cost reduction opportunities are systematically generated and presented to XYZ Inc procurement and production groups.
We provide Technical Support through the eight Degreed Engineers and a myriad of product specialist for the 6,218 unique items we provide for XYZ Inc on a daily basis.
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