Executive Briefings

VMI Helps Automotive Supplier Avoid Parts Inventory Traffic Jam

A conversation with Rainer Dunz, vice president of purchasing and logistics for the North American operations of ZF Group, a Tier I automotive supplier based in Germany.

ZF is a leading supplier of driveline and chassis technology to global manufacturers in the automotive, construction equipment, heavy truck, bus and marine industries. It operates an extensive manufacturing network around the globe, including 23 locations in North America. Worldwide, the company employs around 55,000 people and generates annual sales of more than $15bn. ZF is in the process of implementing vendor managed inventory programs with its suppliers, using technology from SupplyOn.

Q: How large and widespread is ZF's supply base?

Dunz: Coming up with a precise number is hard to do because it depends on how you define supplier. Do you look just at production material or include non-production? Do you go all the way down to very small purchases? When we calculate it, we usually come up with a couple of thousand suppliers around the world, which supply our plant network of approximately 125 facilities in 26 countries.

Q: Do you operate your plants on a just-in-time model?

Dunz: We have all different kinds of models. We have some JIT and some just-in-sequence deliveries, depending on the specifics of the part. In general, each of our plants has different kinds of components coming in, depending on which division it is part of within ZF and which products it is making. For example, if you look at a plant where we produce complete axles, the components coming in are completely different from a facility where we make shock absorbers, which have tiny parts. The ZF divisional structure drives the kinds and value of components that are supplied to a particular facility.

Q: Why did you decide to move to a VMI system?

Dunz: We have a classic kind of automotive supply picture. The way our supply chain is set up, we get orders from our customers, which are the big car and truck manufacturers, based on our contracts with them. When we get their demand, we then send releases to our suppliers, telling them what materials we want on what day and in what quantity. Because of the dynamics within the business, there can be a lot of fluctuations and program changes from our customers, which we have to pass on to our supply base. In some cases, especially with smaller suppliers, this turns out to be a big problem. They don't have the highly sophisticated kind of software that can smooth things out and allow them to manage by exception so they basically have to handle these changes individually, as they occur. That causes problems in their production process that impacts lead time, which then causes them to score poorly on delivery performance. That was one issue we wanted to address.

Another issue we wanted to look at was inventory levels and the trade-offs we were making between inventory and time. You can cover all kinds of process problems by increasing inventory to make sure you can always supply your customer, but that strategy then becomes an issue on the financial side. So we wanted to address both sides of this - to improve our inventory situation and also to make sure we had the right processes to keep the business on track.

We started this project around 2003 and the first thing we looked at was the idea of a vendor managed inventory program. We first created a draft on Excel spreadsheets, calculating the minimum and maximum levels we thought we would need for each component. We tested this logic in a pilot program over a couple of months using three test suppliers at our main site in Friedrichshafen and we saw very positive results.

At around the same time, SupplyOn was developing a VMI solution based on the SAP Inventory Collaboration Hub (ICH), which turned out to be just the solution we needed.

Q: Is ZF one of the founders of SupplyOn?

Dunz: That's right. SupplyOn is an internet marketplace for the automotive industry. It was founded in 2000 by several international automotive suppliers and SAP to basically handle automotive procurement online. Since then, it has evolved into a more complete collaboration platform with applications that go beyond pure procurement.

As a shareholder of SupplyOn, we were committed as a company to making it our strategic platform for communications and information on the supply chain side. We already had selected SAP as our main systems support in most of our facilities and with SAP being a technology partner of SupplyOn, it was a good combination. So when we saw that SAP had developed this Inventory Collaboration Hub, and SupplyOn was using that to build a marketplace application, we had exactly what we were looking for. We didn't feel the need to shop around to see what other vendors could do.

In addition, the fact that we already had started working on this meant that we could share what we had learned with SupplyOn. This is typical of the way we and other shareholders work with SupplyOn. It is a very close partnership and we are able to feed them our ideas in the development phase so that the final solution benefits us all. This is the nice and charming thing about SupplyOn being a marketplace for major Tier I suppliers. We can get to a more standardized approach to common problems instead of having everybody doing their own thing and coming up with separate solutions.

Q: So you were one of the first customers for this VMI solution?

Dunz: Absolutely. And based on what SupplyOn did for us on the VMI application, it is currently the biggest user of SAP's ICH application, at least to the best my knowledge.

Q: Can you give us a walk-through of how the new system works?

Dunz: What we are doing is really pretty simple. Instead of getting a drill-down on our material requirements planning and passing that on to our suppliers one by one, we just give them an overview of what our estimated demand will be for a certain period of time. This is basically a release that we generate based on our production program, but it is only for the supplier to get an idea of the quantities we will need within a certain time frame, usually six to 12 months. We try to project out as far out as possible, but the question is always how firm you can be with planning too far out. Our logistics guys don't want a 24-month forecast. They say you can predict the weather 24 months too, but it doesn't help you because you can't rely on it.

So, we basically show the suppliers what we are seeing out there as our demand. The second step is to give them the minimum and maximum quantities that have to be available for a specific part. The minimum and maximum levels are driven by space availability, value of the part, and a few other factors. Mainly we are using VMI for what we call B and C parts - parts that do not have a high dollar value. Between the min and max figures, it is the supplier's responsibility to figure out when he needs to replenish and in what quantity, again reflecting back to our production schedule.

The nice thing about VMI is that, with this information, the suppliers can smooth their production and throughput based on runs that are efficient for them.

Another important improvement is that the supplier can see any changes in its inventory position with us. In the past the supplier would ship parts and at that time visibility would be lost. He would not know when we received the parts, whether they were through the quality inspection or not, and so on. So he would have no idea what was actually available for production. With VMI, this is much more transparent and the information we provide the supplier is what we consider as inventory that is available for production.

Q: Is this visibility through a portal?

Dunz: Yes. The charming thing about SupplyOn is that it is an internet platform, a marketplace on the internet. So the only thing a supplier needs to have this visibility is a computer with internet access and a browser. All the software is on the marketplace and hosted by SupplyOn. It pulls the data out of our systems into the portal and makes it available to the supplier.

Q: Are suppliers graded on their performance?

Dunz: We track the delivery performance of our major suppliers and we have seen improvements across the board after implementing VMI. In terms of quantity and delivery date, we have a system that gives a supplier 100 percent if it is plus or minus 10 percent on quantity and plus or minus one day on delivery. Outside these parameters, the score is zero.

We also have regular meetings with our suppliers to follow up on any performance issues. This is when we let the supplier know what the next step will be. We or the supplier or both of us may say, "OK, we are pretty confident about the way things are going, so maybe we should try narrowing the minimum and maximum inventory levels and see how that works." That's how we achieve continuous improvement.

Q: Where are you in your roll-out of VMI?

Dunz: We started in Germany in 2005, basically because that is where our corporate headquarters are located and also where SupplyOn is headquartered. We still have a few plants in Germany that we need to get implemented. We also have implemented VMI in Hungary, France and at some facilities in the U.S., especially our facility in Gainesville, Ga. We are continuing to roll it out globally and have started pilots in China and South America.

VMI is going to be a major strategic initiative for us as we move our supply chain to the next level, especially with consolidation and de-consolidation centers around the world. For example, when we do consolidation in Europe and ship to the U.S., where we do deconsolidation, VMI is a very, very important issue because we need end-to-end visibility of these shipments. The same is true if we ship from China to the U.S. or from the U.S. to China. VMI will be an important part of our operations.

A longer version of this interview can be accessed in The Digital Library, www.SupplyChainBrain.com.

 

Resource Link

SupplyOn, www.supplyon.com

ZF is a leading supplier of driveline and chassis technology to global manufacturers in the automotive, construction equipment, heavy truck, bus and marine industries. It operates an extensive manufacturing network around the globe, including 23 locations in North America. Worldwide, the company employs around 55,000 people and generates annual sales of more than $15bn. ZF is in the process of implementing vendor managed inventory programs with its suppliers, using technology from SupplyOn.

Q: How large and widespread is ZF's supply base?

Dunz: Coming up with a precise number is hard to do because it depends on how you define supplier. Do you look just at production material or include non-production? Do you go all the way down to very small purchases? When we calculate it, we usually come up with a couple of thousand suppliers around the world, which supply our plant network of approximately 125 facilities in 26 countries.

Q: Do you operate your plants on a just-in-time model?

Dunz: We have all different kinds of models. We have some JIT and some just-in-sequence deliveries, depending on the specifics of the part. In general, each of our plants has different kinds of components coming in, depending on which division it is part of within ZF and which products it is making. For example, if you look at a plant where we produce complete axles, the components coming in are completely different from a facility where we make shock absorbers, which have tiny parts. The ZF divisional structure drives the kinds and value of components that are supplied to a particular facility.

Q: Why did you decide to move to a VMI system?

Dunz: We have a classic kind of automotive supply picture. The way our supply chain is set up, we get orders from our customers, which are the big car and truck manufacturers, based on our contracts with them. When we get their demand, we then send releases to our suppliers, telling them what materials we want on what day and in what quantity. Because of the dynamics within the business, there can be a lot of fluctuations and program changes from our customers, which we have to pass on to our supply base. In some cases, especially with smaller suppliers, this turns out to be a big problem. They don't have the highly sophisticated kind of software that can smooth things out and allow them to manage by exception so they basically have to handle these changes individually, as they occur. That causes problems in their production process that impacts lead time, which then causes them to score poorly on delivery performance. That was one issue we wanted to address.

Another issue we wanted to look at was inventory levels and the trade-offs we were making between inventory and time. You can cover all kinds of process problems by increasing inventory to make sure you can always supply your customer, but that strategy then becomes an issue on the financial side. So we wanted to address both sides of this - to improve our inventory situation and also to make sure we had the right processes to keep the business on track.

We started this project around 2003 and the first thing we looked at was the idea of a vendor managed inventory program. We first created a draft on Excel spreadsheets, calculating the minimum and maximum levels we thought we would need for each component. We tested this logic in a pilot program over a couple of months using three test suppliers at our main site in Friedrichshafen and we saw very positive results.

At around the same time, SupplyOn was developing a VMI solution based on the SAP Inventory Collaboration Hub (ICH), which turned out to be just the solution we needed.

Q: Is ZF one of the founders of SupplyOn?

Dunz: That's right. SupplyOn is an internet marketplace for the automotive industry. It was founded in 2000 by several international automotive suppliers and SAP to basically handle automotive procurement online. Since then, it has evolved into a more complete collaboration platform with applications that go beyond pure procurement.

As a shareholder of SupplyOn, we were committed as a company to making it our strategic platform for communications and information on the supply chain side. We already had selected SAP as our main systems support in most of our facilities and with SAP being a technology partner of SupplyOn, it was a good combination. So when we saw that SAP had developed this Inventory Collaboration Hub, and SupplyOn was using that to build a marketplace application, we had exactly what we were looking for. We didn't feel the need to shop around to see what other vendors could do.

In addition, the fact that we already had started working on this meant that we could share what we had learned with SupplyOn. This is typical of the way we and other shareholders work with SupplyOn. It is a very close partnership and we are able to feed them our ideas in the development phase so that the final solution benefits us all. This is the nice and charming thing about SupplyOn being a marketplace for major Tier I suppliers. We can get to a more standardized approach to common problems instead of having everybody doing their own thing and coming up with separate solutions.

Q: So you were one of the first customers for this VMI solution?

Dunz: Absolutely. And based on what SupplyOn did for us on the VMI application, it is currently the biggest user of SAP's ICH application, at least to the best my knowledge.

Q: Can you give us a walk-through of how the new system works?

Dunz: What we are doing is really pretty simple. Instead of getting a drill-down on our material requirements planning and passing that on to our suppliers one by one, we just give them an overview of what our estimated demand will be for a certain period of time. This is basically a release that we generate based on our production program, but it is only for the supplier to get an idea of the quantities we will need within a certain time frame, usually six to 12 months. We try to project out as far out as possible, but the question is always how firm you can be with planning too far out. Our logistics guys don't want a 24-month forecast. They say you can predict the weather 24 months too, but it doesn't help you because you can't rely on it.

So, we basically show the suppliers what we are seeing out there as our demand. The second step is to give them the minimum and maximum quantities that have to be available for a specific part. The minimum and maximum levels are driven by space availability, value of the part, and a few other factors. Mainly we are using VMI for what we call B and C parts - parts that do not have a high dollar value. Between the min and max figures, it is the supplier's responsibility to figure out when he needs to replenish and in what quantity, again reflecting back to our production schedule.

The nice thing about VMI is that, with this information, the suppliers can smooth their production and throughput based on runs that are efficient for them.

Another important improvement is that the supplier can see any changes in its inventory position with us. In the past the supplier would ship parts and at that time visibility would be lost. He would not know when we received the parts, whether they were through the quality inspection or not, and so on. So he would have no idea what was actually available for production. With VMI, this is much more transparent and the information we provide the supplier is what we consider as inventory that is available for production.

Q: Is this visibility through a portal?

Dunz: Yes. The charming thing about SupplyOn is that it is an internet platform, a marketplace on the internet. So the only thing a supplier needs to have this visibility is a computer with internet access and a browser. All the software is on the marketplace and hosted by SupplyOn. It pulls the data out of our systems into the portal and makes it available to the supplier.

Q: Are suppliers graded on their performance?

Dunz: We track the delivery performance of our major suppliers and we have seen improvements across the board after implementing VMI. In terms of quantity and delivery date, we have a system that gives a supplier 100 percent if it is plus or minus 10 percent on quantity and plus or minus one day on delivery. Outside these parameters, the score is zero.

We also have regular meetings with our suppliers to follow up on any performance issues. This is when we let the supplier know what the next step will be. We or the supplier or both of us may say, "OK, we are pretty confident about the way things are going, so maybe we should try narrowing the minimum and maximum inventory levels and see how that works." That's how we achieve continuous improvement.

Q: Where are you in your roll-out of VMI?

Dunz: We started in Germany in 2005, basically because that is where our corporate headquarters are located and also where SupplyOn is headquartered. We still have a few plants in Germany that we need to get implemented. We also have implemented VMI in Hungary, France and at some facilities in the U.S., especially our facility in Gainesville, Ga. We are continuing to roll it out globally and have started pilots in China and South America.

VMI is going to be a major strategic initiative for us as we move our supply chain to the next level, especially with consolidation and de-consolidation centers around the world. For example, when we do consolidation in Europe and ship to the U.S., where we do deconsolidation, VMI is a very, very important issue because we need end-to-end visibility of these shipments. The same is true if we ship from China to the U.S. or from the U.S. to China. VMI will be an important part of our operations.

A longer version of this interview can be accessed in The Digital Library, www.SupplyChainBrain.com.

 

Resource Link

SupplyOn, www.supplyon.com