A 1-2 Combination for Knock-Out Supplier Collaboration Success
I’m a martial arts practitioner – amateur to be sure, but it’s something that keeps me healthy, focuses the mind, and informs a lot of what I do. So, it may be no surprise that I see parallels between martial arts and what I focus on in my day job – namely helping companies find ways to increase supply chain efficiency, effectiveness, and resiliency with business networks.
The 1-2 punch
When training in martial arts, which for me is Muay Thai, there’s often a lot of focus on delivering effective combinations. The 1-2 punch – a jab, then a cross – is one of the most common and most effective combinations. Get it right, and you have a powerful fighting tool in your arsenal.
One of the most powerful 1-2 combinations an organization can build into its supplier collaboration arsenal is supplier managed inventory (SMI) combined with consignment. Let me explain.
On its own, SMI is extremely powerful. In traditional procurement scenarios, you – the customer, the merchant, or the distributor– typically sends the supplier a standard purchase order (PO) when new goods or materials are needed.
However, with SMI, the roles are reversed. Here, your supplier jumps into the ring and assumes responsibility for the replenishment. Done correctly – with all the necessary inventory and demand visibility – you can drive process efficiency with fewer transactions and touch points. You can gain supply assurance based on your fluctuating demand and inventory with a lot less work on your part.
But SMI is only the jab – or maybe I shouldn’t say “only.” After all, a good combination requires a setup and a follow-through. In this case, the follow-through – or the cross – is consignment.
Like a local used-clothing store that runs on consignment, the idea here is that inventory replenished by the supplier with SMI is not invoiced until it is used. It’s when you pull inventory off the shelf as part of your consumption process that the invoice is triggered.
The result is that you spend less time working on inventory replenishment, and you only pay when you use the inventory. From a supply chain perspective, this is a knock-out combination.
More like a dance than a fight
But let’s be careful not to characterize this scenario as adversarial.
In the TV series, The Sopranos, there’s a scene where the main character ends up in the hospital. To pass the time, he watches a boxing match with another character – a “rocket scientist” from Bell Labs played by Hal Holbrook. During the match, the rocket scientist floats the idea that the boxers are, in fact, not separate adversaries, but are one and the same, both part of the same quantum field – like ocean waves that appear to be separate, but are actually one symbiotic entity.
I like this idea for buyers and sellers in a supply chain relationship — where success is defined more by the relationship and less by the entities involved. Or as I like to see it, these entities are like dancers – and the dance is more important than individuals performing the dance.
But let’s not get overly philosophical. We’re talking about supply chain collaboration here. The point is that with the 1-2 combination of SMI and consignment, both you and your suppliers’ benefit.
What do the suppliers get? They get demand signals that are generated systematically rather than receiving many discrete POs lobbed at them. This visibility allows the supplier to plan more effectively. They can control replenishment and transport with greater accuracy. Fewer emergency orders mean more regularized and predictable costs and the opportunity to benefit from economies of scale.
Made possible with SAP® Business Network
The question at this point is how do you achieve the real-time visibility and collaboration required to succeed with the 1-2 combination of SMI and consignment? This is where SAP® Business Network can help.
As the largest business network in the world, SAP Business Network brings together customers and trading partners on a single platform. Instead of e-mail and spreadsheets, or one-off point-to-point connections, you collaborate over a many-to-many network designed for enhancing supply chain relationships – a network that enables transparent collaboration, real-time insight, scalability, and tight integration with your back-end ERP.
The network is designed for simple and sophisticated business scenarios, like SMI and consignment, for mission-critical direct materials. These solutions are flexible, supporting both SMI scheduling agreements and supplier replenishment orders, in conjunction with consignment, based on native integration into SAP ERP and SAP S/4HANA®.
To keep all parties aligned, Supply Chain Monitor provides buyers and planners with inventory exception alerts to proactively identify out-of-stock, above maximum, below minimum, and out-of-tolerance situations. Consignment consumption reporting, meanwhile, accounts for inventory movements. This visibility ensures the supplier accurately invoices against the withdrawal. Alternatively, the buyer can self-bill with an ERS (evaluated receipt settlement) and send the invoice to the supplier across the network; the supplier can also see the scheduled payments and remittance for cash flow confidence.
Real benefits to be had
On the SMI side, none of this is speculative. SAP has real-world implementations in place where customers are reaping the benefits. One customer, a leading medical device manufacturer, adopted a direct procurement strategy – transforming from a pull model to a push model with SMI. Now the company can make sure stock is available earlier while reducing procurement lead times. It has also automated supply planning processes, PO confirmations, PO change visibility, and invoice processing.
Another customer, a personal care cosmetics company, was able to increase speed, traceability, and standardization for forecast, ordering, and scheduling processes. This helped optimize working capital and drive policy compliance with SMI and quality collaboration.
In summary, I posit that this 1-2 combination helps drive inventory efficiency to improve cash flow, reduce cost, and enhance customer service. By adding consignment to the equation, companies stand to benefit even more. Generally speaking, organizations adopting SMI and consignment with SAP Business Network can expect to:
- Improve control and visibility over inbound shipments and stock levels by enforcing minimum and maximum thresholds
- Reduce supplier lead times and improve cash flow and inventory turns by deferring transfer and payment of goods until consumption
- Drive process efficiency with fewer transactions and touch points while improving supplier responsiveness to fluctuating demand and inventory
What does this mean? Per SAP Performance Benchmarking companies have realized:
- 4% to12% lower DIO
- 9% to 25% lower FTE cost
- 8% to 23% lower revenue loss due to stock-outs
And remember, when you emphasize the relationship aspect between you and your trading partners, the advantages accrue on both sides of the equation. This means your critical trading partners will be there to support you to make the most of the 1-2 combination.
Get your organization in shape today
If your organization is looking to move forward, I recommend that you start by visiting us at visit us at https://www.sap.com/products/business-network.html to review a short demo video or solution brief that you can find there. Please let us know in the comment section below what your thoughts are and what challenges you are currently facing.
That’s it for today, Grasshopper. See you on the mat.