Monday, August 12, 2013

Replenishment Logistics Programs

In a replenishment logistics program what occurs is tbe supplier will stock a replenishment logistics location with goods that can be pulled by the buyer upon demand. The replenishment logistics stock could be held at a supplier location, a third party location such as a warehouse agent, or it could be held in a separate secure area at the buyer’s location. The decision on the best place to have the materials stocked will be impacted by the transit time and where the sale occurs. For example a supplier may not want to stock products at a local site in a different country as that would make it a local sale and would require the supplier to be registered to do business there, and be subject to both local laws and taxes. In many international relpenishment logistics programs (“RLP”) stocking to the closest point without being negatively impacted can be done at bonded warehouses in free trade zones. In non-international RLP’s another consideration in the stocking location is whether the location taxes inventories held within that location. I believe in the U.S. the state of California had an inventory tax and as such many stocking locations were located in Nevada, which didn’t have an inventory tax

When you contractually need to implement an RLP as part of an agreement or as a separate document to be made part of the agreement there are a number of things that you need to address. A RLP document is just like any other contract in that it needs to define the scope of the activity,
all the notices and actions that are required, and what each party is responsible to perform. For example, if the inventory will be held by a third party under contract to the buyer, their responsibilities need to be defined.

Other things that normally get defined are:

"The Liability Horizon". This is frequently required when what you are purchasing is custom or unique. It will establish the period of time for each specific product that the buyer would be liable. This is similar to negotiating the point at which a product becomes non-cancelable and non-returnable. This is used to establish the maximum liability for each product that is being replished as a result of a pull from the RLP inventory.

"The Liability Horizon Quantity". This is the specific quantity of Pull Products that you want to have included in the RLP process. specified in the Planning Schedule contained within the Liability Horizon. The quantity may be adjusted based upon the Buyer’s forecast of products that the buyer will need to provide and update.

"Planning Schedule. To allow the supplier to manage the inventory and the replenishment of stock, the buyer needs to provide an initial forecast of requirement for the products to be managed under RLP, and provide periodic updated forecasts of future requirements. The better you manage this the less inventory you may have to purchase in the end if you don’t consume it.

"Replenishment Time" means the total elapsed time from Supplier receipt of a Pull Notification to their replenishment at the stocking location. The negotiation of replenishment time is the same as negotiating leadtime with the exception that it needs to include transit time to the stocking point.

When products are drawn from the inventory that is called a “pull”. So when you have RLP you will normally establish and define:
Pull Products that identifies the specific products that will be subject to the RLP process.
Pull Product profiles that provide the specific information about the iten included in the RLP Process such as Product Type, Part Number, Liability Horizon, the Liability Horizon Quantity and the Replenishment Time.
Pull Buffer that means a quantity of Pull Products that are desired to be held in inventory at the stocking location. In a pull replenishment system the supplier needs to use both the actual pulls made, the forecast and the known replenishment time to try to manage the on-hand stocking and replenishment to meet the desired buffer stock. For the buyer to make a pull, they need to notify the stocking location to either make the goods available or to ship the goods to buyer. Once pulled, the supplier needs to be notified for two reasons. One is so they can order replenishment stock. The other is so they can invoice the Buyer. As such there may be two pull notifications or a buyer may notify both the stocking location and the supplier of their authorization to deliver the specific quantity the buyer requires.

Most replenishment logistics programs are managed using blanket purchase orders that provide a billing reference. Those blanket purchase orders are never a firm commitment to purchase the full amount of the order. Individual "Pull Purchase Order" usually managed electronically make the actual purchase commitment.

If flexibility is required a RLP document will include parameters for potential upside flexibility in demand that will also require overage limits on the liability quantity to meet the required upside.

One of the keys in managing replenishment logistics is adjusting the pull buffer as demand changes so you don’t wind up with excess materials that you may be liable to purchase if they were custom or unique. Suppliers want your forecasts to be accurate and not overstated as they are effectively financing the cost of the inventory until you pull it. Suppliers may want the right to terminate a replenishment logistics program if you contiually abuse it by forecasting a higher demand than you actually require.

Supplier Responsibilities

The supplier responsibilities under a replenishment logistics program will vary based upon where the goods are stocked and who controls the stocking location. For example if the supplier has the materials stocked and a supplier stocking point their responsibility is priarily to stock what was agreed and manage the pull and replinishment processes. If the stocking will be at a third party warehouse that they will manage, you want them to contract with that warehouse agent to ensure that both buyers rights and protections and the suppliers rights in the material are protected and the material is properly stored, handled and managed to prevent any loss or damage as you wouldn’t want to be liable over an activity you don’t control. You also want that contract to establish the activities they are required to perform such as making the goods available or shipping the goods opon receipt of a pull notice and notifying the supplier of the specifics of what was pulled for their records and to invoice the buyer. If the stocking point was at the buyer site the resonsibilities and requirements would different. They would need access to the site to stock inventory and be able to audit the quantities actually consumed. You would want them to comply with your rules or guidelines for on premises work such as safety, security and personal conduct. Responsibility for the material, stocking area, and authorization for individuals that could pull from the inventory would be negotiated. From a delivery perspective you would want the supplier to pay everthing that is necessary to get the materials to the stocking location. The last thing you want the supplier to do is to manage the inventory using their best efforts so they keep track of pulls and manage internal orders for replenishment so replenished product arrives within the agreed replenishment time after the pull.

Buyer Responsibilities

In a replenishment logistics program where the stocking location is controlled by the supplier, the buyer has a limited number of responsibilities. They need to create all the documents needed for the pull – the
pull products, pull profile and the pull buffer. Once those are in place they need to provide and update the planning schedule (forecast) on a periodic basis (usually monthly). If there are custom or unique products that are being inventories, you frequently will be required to purchase any that you don’t consume. This means that the buyer should also be managing and potentially reducing the quantities held in the pull buffer, when there are known potential changes to the demand such as the introduction of a new product that would take sales away from the product for which the pull program was created or potential end of production for the product that uses those materials. Lastly the buyer has to pay for both the items they pulled that weren’t defective and returned and the buyer may need to pay cost to have the inventory re-deployed to a location where is may be consumed.

Liability Concerns

While a supplier may agree to do a pull replenishment program and assume the costs of doing that they may want to include those extra costs in the price. Many times the motivation of a supplier in doing a repenishment logistics program is it locks you more into using them and change from them may be timely so they will have certain business guaranteed. Their biggest concerns are when: there is excess quantity of materials in stock; the buyer makes changes to their product design that obsoletes their product; or the buyer’s product that it is used is in end of life without further consumption. How this gets managed in the contract will again be dependent upon whether the product is standard (where it could be used elsewhere) or unique (which may or may not be able to be used elsewhere) or custom where it has no use elsewhere other than for potential scrap value.

For a standard product that has an excess inventory you would normally allow or even require the supplier to re-deploy it. For standard product that isn’t consumed by you, re-deployment should also be required. One of the reasons why you want the supplier to manage the inventory is many products may have a shelf life and if that date has passed in may not be saleable. Who pays for the cost of shipping that would be subject to negotiation. If there are unique products that would be usable by other supplier customers you would also want those to be re-deployed.

For unique product that don’t have a market or custom products, when they become excess or obsolete,
the buyer must normally purchase those products. Sometimes they may be set aside for spare parts inventories incase the original one breaks and is no longer covered by warranty. With these same types of products since you required automatic replenishment to meet your pull buffer requirement you will also be responsible and work in process (WIP). Many times what makes something custom or unique may not happen until the latter stages of production, so you only want to be responsible for WIP that has gone through those stages. In that the decision always comes down to which is better for you. Do you pay the additional cost to complete the product and inventory it or do you pay the supplier’s costs to have the material scrapped. In that you would pay them the value of their work in process less any scrap value.

Joint activity
In managing a replenishment logistics program the buyer and supplier need to work together. They both need to agree upon the pull profile and the pull buffer. They need to work together to make adjustments based upon existing inventory levels, forecasts and changes in demand. They need to work together and with any warehouse agent to communicate transactions and changes in consumption. For example if a buyer pulls a product and it turns out to be defective, they will pull another one from the stock, but they also need to promptly notify the supplier and return the material for warranty repair so it may be place back into stock. They also need to work together to reconcile any differences in consumption and they will need to work together to reconcile liability.