The importance of an integrated customer-supplier chain

28 March 2019

Since the 2009 crisis, the metalworking market has become increasingly frenetic and fragmented. The huge stocks that customers were used to keeping, so they could respond promptly to market demand, have been slashed to free up liquidity.

Although the market has since returned to pre-crisis levels, the way that warehouse stocks are managed has changed irreversibly. Stock management is obviously fertile ground for efficiency improvements. For many manufacturing companies, stocks are the major part of their working capital, and stock management incorporates various types of cost: implicit costs such as the financial price of stocked goods, and explicit costs such as handling, storage and obsolescence risk.

Initially, consignment stock contracts were used, but that merely shifted the financial commitment from the customer to the supplier.

What is a consignment stock contract?

With this type of agreement, the supplier agrees to keep a pre-defined volume of stocks on the customer’s premises. The goods remain the property of the supplier until the customer picks them to use in production, or to sell. Obviously, in this way the implicit costs are passed to the supplier, while the explicit costs remain the responsibility of the customer.

This solution offers advantages for the customer, who can free up financial resources for other uses, and from the supplier’s point of view, it creates a partnership bond with the customer. However, it is a rather inflexible solution, which is excellent for steady-selling products, but may not be suitable for goods whose consumption fluctuates widely over time. In the case of stocks that are likely to decrease, it is possible that market demand will not be met at peak times, whereas stocks that are likely to increase will immobilise capital, and increase the risk of obsolescence. Where the trend remains more or less stable, all that is needed is periodic stock recalibration. The VMI was created to make this system more flexible.

A Vendor Managed Inventory (VMI) is a system that gives the supplier all the information they need to set the stock level at any given time. In other words, the supplier has a computer linked to the customer, and can see the sales data or forecasts for the future.This gives the supplier a clear view of the expected trends, so they can increase or reduce the stocks accordingly.

As the supplier is connected to the operating systems, they can save the work of uploading orders. Also, by following the trends, stock levels can be adapted more precisely to fit requirements, so the amount of immobilised capital is lower. The drawback is that each customer has a different system and so the integration needs to be designed specifically in each case. It is a system that requires great customer loyalty. Integration systems involving manual data entry on the website of either party actually lose much of the advantage of this solution.
Came offers its most loyal customers different solutions to fulfil their needs:

  • Forecasting contracts for the purchase of unfinished stators to reduce the lead time of total throughput
  • Came stock holding contracts, which reduce the lead time to packaging and transport only
  • Consignment stock contracts where stocks are held with customers, eliminating the lead time
  • VMI consignment stock contracts for perfect synchronisation of the stock configuration system

We currently have about 20 stock management contracts with our customers. The solutions are working very well with smaller customers, and also with large international groups.
We are convinced that this is the way forward. Our customers can only benefit from supply chain integration. Our business idea is a win-win policy, where the supplier works with the customer to find the best way to jointly serve the market.

Article by:
Stefano Rossato
General Manager of Came
+39 0444 488282