I recently read an academic paper from the WHU-Otto Beisheim School of Management called “3rd Party Logistics Providers’ Role in Replenishment” that I liked. The paper contained good information, but it was also a bit long and kind of dense (although not nearly as inaccessible as most academic articles). I realized after reading it that the vocabulary used by most supply chain managers to talk about replenishment is extremely limited. This means that the models we use to think about replenishment are also imperfect. Therefore, in order to make intelligent decisions about which style of replenishment is best suited for a particular supply chain, we first need to visualize the different models available.
So, my goal today is to show you (in a concise way) the core model from the article, along with my own spin on it.
Replenishment spans across planning, management, and the actual ownership of inventory. Buyers, vendors, and various third parties typically play a role in replenishment, and the inventory managed spans across raw materials, work-in-process (WIP), and finished goods.
Based on this hierarchy, you can model different styles of replenishment by asking which party is responsible for inventory forecasting, inventory management, and inventory ownership.
However, these traditional models don’t portray the full array of replenishment models available when you consider the full set of players that can participate in this process. First of all, many manufacturers have outsourced their logistics and manufacturing processes to third parties. These third parties often take responsibility for inventory management and perhaps also take ownership of certain types of inventory. However, outsourcing inventory planning is far less common. In short, working with third parties is very common for supply chain execution, but very uncommon for supply chain planning.
Actually, there are other third parties besides contract manaufacturers and logistics service providers that could be involved in inventory planning. These third parties have distinct value propositions depending on the type of inventory involved and whether you’re talking about inventory planning or management.
- Contract Manufacturers: Management and ownership of raw materials and WIP are a natural extension of current activities.
- Third Party Logistics: Inventory management of raw materials for supplier hubs feeding factories; inventory management of finished goods for their customer’s customer; inventory ownership for 3PLs with performance-based logistics (PBL) contracts .
- Consultants: Ability to do advanced forecasting and inventory planning, potentially using very capable but low cost planners from offshore locations. Support for their customer’s S&OP process.
- Software vendors: Ability to use demand planning and multiechelon inventory optimization tools to their fullest extent. Support for their customer’s S&OP process.
When one considers players in the replenishment process other than buyers and vendors, it becomes readily apparent that new replenishment models are possible-at least nine new scenarios, and many more if you consider collaborative planning scenarios.
Further, there is a natural tendency to think about replenishment in terms of finished goods. A broader perspective is necessary. The diagram below shows just a few of the many possible options.
In conclusion, when thinking about different types of replenishment models, it is also important for companies to think about creating joint benefits. In the Buyer Managed, Vendor Owned scenario (also known as consignment) the buyer wins while the vendor incurs extra costs. Those costs are eventually passed along to the buyer in the form of higher prices. However, in classic VMI while the vendor does hold more inventory, it also gains some flexibility in terms of when to schedule production runs. This can lead to lower production costs and a win/win relationship that saves both companies money.