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kalandi-nayak
Product and Topic Expert
Product and Topic Expert

Supplier Managed Inventory (SMI also known as VMI) is a supply chain initiative where the supplier takes responsibility for managing inventory levels and replenishment for their customers. Replenishment-based VMI focuses specifically on ensuring that inventory levels are maintained to meet customer demand while minimizing excess stock and shortages.

Key Components

1. Data Sharing:

  • Sales Data: Customers share sales data with suppliers to provide insights into demand patterns.
  • Inventory Levels: Real-time inventory levels are communicated to the supplier.
  • Forecasts: Customers may share their demand forecasts, which suppliers use to plan production and distribution.

2. Automated Replenishment:

  • Suppliers use inventory data to trigger replenishment orders automatically when stock levels fall below predefined thresholds.
  • Algorithms and software systems can optimize order quantities and timing to balance supply with demand.

3. Agreements and Contracts:

  • Service level agreements (SLAs) outline the performance metrics, such as fill rates, delivery times, and inventory levels.
  • Contracts define the responsibilities, processes, and financial terms between the supplier and customer.

4. Technology Integration:  

  • Advanced IT systems and ERP software facilitate seamless data exchange and processing.

Benefits for Buyer

1. Improved Inventory Management:

  • Reduces stockouts and excess inventory, leading to lower holding costs and improved cash flow.
  • Enhances inventory accuracy and visibility across the supply chain.

2. Cost Savings:

  • Reduces administrative costs associated with placing and managing orders.
  • Economies of scale in transportation and order processing can be achieved.
  • Improve the working capital with optimized inventory.

3. Increased Service Levels:

  • Higher fill rates and improved delivery performance enhance customer satisfaction.
  • Responsive and flexible supply chain capable of adapting to demand fluctuations.
  • Improve service levels by having the product at the right time and location.

4. Efficiency Gains:

  • Streamlined replenishment processes reduce lead times and improve supply chain responsiveness.
  • Better alignment of supply and demand reduces waste and inefficiencies.
  • Reduce planning and ordering costs by shifting the responsibility to the supplier.

Benefits for Supplier

  • Visibility of the buyer’s demand and inventory data enables more accurate forecasting and planning.
  • Reduce buyer ordering errors resulting in a decrease in potential returns.
  • Visibility of stock levels enables proper prioritization of orders.
  • Stabilizing the timing of order generation based on a predefined basis improves supply reliability.
  • A true partnership is formed between the buyer and the supplier. They work closer together and strengthen their ties.

Replenishment based Supplier Managed Inventory Collaboration with SAP Business Network

SMI – Supplier Managed Inventory provides foundational capability for Supply Chain Collaboration between Buyers and Suppliers by sharing inventory, demand information and replenishment of inventory based on established Min/Max levels.

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There are two variation of Supplier Managed Inventory Collaboration process as shown below

SMI Process Flow (Planned Shipment) with Scheduling Agreement

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SMI Process Flow (Replenishment Order)

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SMI Process Flow (Planned Shipment) with Scheduling Agreement process explanation

Step 1 --> The Material master is configured for SMI process in the MRP Area as shown below.

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Step 2 -->Creation of Scheduling Agreement Release with pricing details.

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Step 3 -->Extract SMI relevant data by executing T-code ARBCIG_PROA_SMI_EXTRACT in SAP S4HANA and send them to SAP Business Network.

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Step 4 --> SMI key figure configurations and formula. Custom key figures can be added and associated formula can configure as necessary.

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Step 5 --> Supplier View of SMI Relevant data and Key Figures including (Stock on hand , Min / Max, projected stock , Lead times , gross demand , stock out situations etc.

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Supplier can get the insights with respect to Inventory situations over the time series in a graphical manner.

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SAP Business network can calculate using formulas and provide insights with respect to Projected stock situations , Days of Inventory etc.

Based on information available and supplier side situation, supplier can create planned shipment from SAP Business Network as shown below.

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Step 5 --> Once the supplier submit the Planned Shipment, with integration the Planned shipment quantity would be added as Delivery schedule line of the Scheduling Agreement. The rest of the process of ASN and GR and Invoice would continue as per the normal scenarios.

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Key figure Descriptions

  • ASN Received:  The total Goods Received quantity is an AN Calculated based on the ASN that was received against the ASN Delivery Date referencing the time bucket.
  • Firmed Orders: The total Purchase Order or Scheduling Agreement quantity is an AN Calculated where the delivery date matches the time bucket.
  • Gross Demand: The total gross requirements in the buyer’s system that was transferred to AN via cXML element Gross Demand.
  • In-Transit: The In-transit quantity is an AN Calculated value based on the ASN created by Supplier where the delivery date matches the time bucket. The In-transit will not include ASN’s that are Goods Receipted.
  • Maximum Proposal: The Maximum Proposal is AN Calculated formula driven Key figure where Maximum Proposal Stock is the quantity needed to attain the Maximum Stock level.                      The formula that is represented is "Projected Stock – Max Stock"
  • Minimum Proposal: The Minimum Proposal is AN Calculated formula driven Key figure where Minimum Proposal Stock is the quantity needed to attain the Minimum Stock level.                        The formula that is represented is  "Projected Stock – Minimum Stock".
  • Net Requirement: The Total Net Requirement in the buyers system that was transferred to AN via cXML element Net Requirement.
  • Order Received:  The total Order Received quantity is an AN Calculated based on the Goods Received against the PO in the AN based on the PO delivery Date.
  • Planned Shipment : The Planned Shipment is the Supplier entered value based on Supplier production schedule.
  • Target Stock : The Total Target Stock maintained in the buyers system that was transferred to AN via cXML element Target Stock.
  • Total Shipment : AN Calculated Key figure that represents the total Shipment(In-transit or Received) for each time period based on the Delivery Date of the ASN.
  • Projected Stock :  The projected stock is a key figure that is critical for Inventory visibility. AN calculates the projected stock from demands, receipts, and stocks. The projected stock provides information about the demand/stock balance of a location product in a period. The projected stock is the stock of a product that is expected to be available at the location at the end of a period. A Buyer or Supplier can ascertain from this key figure how the demand/stock balance develops over time and whether critical stock situations occur.
  • Current time period projected stock : Today’s projected stock = Stock + all receipts with delivery date today – all demands with demand date today.
  • Projected stock on any later day : Projected stock of this day = projected stock of the previous day + receipts with delivery date on this day − demands with demand date on this day.

Conclusion

The success of a replenishment based VMI system depends on effective collaboration, accurate data sharing, robust technology, clear agreements, and continuous improvement. By focusing on these critical factors, suppliers and customers can create a mutually beneficial VMI system that enhances inventory management, reduces costs, and improves overall supply chain performance.

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