What is the Orderfree Supply Chain?
Every year Orderfree Supply Chain, also known as Vendor Managed Inventory (VMI) is becoming more popular and widespread. However, Orderfree Supply Chain is not a new concept, it has been standard practice since the end of last century in some industries such as the automotive industry.
In the retail industry, American Walmart was an VMI pioneer launching their Orderfree Supply Chain program in the 1980’s. This solution was one of Walmart’s competitive advantages for a long time and one of the company’s cornerstones which allowed the company to expand its business fast. One of the reasons why Amazon could expand their business and dominate the online retail market is that the company actively used Orderfree Supply Chain solutions with most of their suppliers. Today, this solution is a requirement to do business in many geographies and industries. For example, in many supply chains in the Netherlands, Germany, France and Switzerland it is nearly impossible to do business without an Orderfree Supply Chain solution.
How Orderfree Supply Chain Works
The idea behind Orderfree Supply Chain is simple – the supplier keeps stock in an agreed location, guarantees availability of goods and manages stock levels. Usually, the stock is held at the place of consumption, although this can vary depending on supply chain logic. For example, it may make sense to keep Orderfree Supply Chain stock before the painting line in a factory in order to enable shorter lead times if there is a large assortment of colors.
There are three main differences in how Orderfree Supply Chain works compared to traditional purchasing processes:
- There are no orders – goods are automatically replenished based to consumption data;
- All responsibility to maintain adequate stock levels is transferred to the supplier;
- The stock belongs to the supplier until it is consumed.
These solutions require that consumption data is transmitted to the suppliers in real time. In this way, the suppliers know what items to replenish and are able adjust stock levels if consumption levels change over time.
In an Orderfree Supply Chain solution, the transmission of consumption data can be conducted in a traditional way, i.e. a person counts what items have been consumed and sends the data to the supplier. The data transmission can also be done in a more modern way, where consumption data is registered digitally and sent directly to the supplier’s ERP system. In both cases, an Orderfree Supply Chain solution can work effectively. The main difference lies in administrative costs that are lower if the information is transmitted digitally.
What Makes Orderfree Supply Chain Attractive for Buyers?
The three largest benefits of this solution are better availability of supplies, lower purchasing costs, and less inventory on the balance sheet.
Better Supply Availability
It’s a simple premise – that supplies must always be available. Traditionally, purchasers ensure availability by buying the right quantities. Suppliers’ only role is to deliver the goods on time. When goods do not arrive on time purchasers are responsible for not foreseeing the situation and for bad planning. By shifting the responsibility to suppliers, the availability usually improves. This is due to the promise that Orderfree Supply Chain is based upon; purchasing at any time, if goods are available. This solution turns all stock-outs into lost sales for the suppliers. With Orderfree Supply Chain it is no coincidence that suppliers make availability their most important objective.
Another reason why availability is improved with this solution is that suppliers get better consumption data. Suppliers get more information and therefore a better understanding of possible capacity issues. Suppliers are also better vested to quickly recognize when market demand increases and when there may be shortages or delivery delays.
Lower Purchasing Costs
High-quality purchasing functions are expensive. They require good information systems, fast data processing and competent employees. Even when these three requirements are fulfilled, the question often remains – what do purchasers spend most of their time on? Usually the answer is administrative tasks such as creating, managing, monitoring and filing orders. What Orderfree Supply Chain solutions do is alter the whole ordering process. When orders are eliminated, man-hours are reduced, as are other costs associated with administrating them. However, it is important to note that this solution can almost never fully replace traditional purchasing. There are usually some items that can’t be handled effectively in Orderfree Supply Chain such as purely seasonal products or project-specific products.
As a side effect of this solution’s “no orders” operations, the hidden costs of emergency purchases will decrease. How often has someone at your company had to perform extra tasks to solve a sudden case of out-of-stock? No matter if it is making an extra phone call, driving to a shop, paying for express delivery or something else, all these activities and costs will diminish significantly with Orderfree Supply Chain.
Less Inventory on the Balance Sheet
An “ Orderfree Supply Chain solution” is often referred to as a solution where a client automatically sends consumption data to a supplier. However, in real Orderfree Supply Chain solutions, the stock held on a client’s premises always belongs to the supplier. The transfer of stock ownership takes place when the product is consumed. In traditional purchasing operations there is usually some excess stock held. Because of the enhanced consumption data, these solutions help reduce excess stock once and for all.
The greatest benefits are reached when this solution is implemented at several suppliers. When this is the case, inventory reductions are often significant. Cash is freed and previously locked growth opportunities can be pursued. It’s also important to point out that if Orderfree Supply Chain is implemented correctly, there will be no increase in the supplier’s total inventory. Considering the many positive effects of this solution, why it is not the standard everywhere?
When the Value of Orderfree Supply Chain Solutions can be Questioned
These solutions can be very effective in a wide range of industries and supply chains, yet there are some circumstances where the value is diminished. Here are some situations in which Orderfree Supply Chain is less effective:
- Replenishment time is too long. As a rule, if replenishment time (production time, transportation time and delivery interval) exceeds 1 month, an Orderfree Supply Chain solution may not be effective. In this situation it’s difficult to avoid stock-outs, thus providing excellent availability is a challenge. It is important to note that long replenishment time is often something that can be shortened and should therefore be considered more as an obstacle than a fact of life.
- The minimum order quantity is several times higher than the short-term consumption levels. For example, if the monthly consumption is 100 pieces, but the supplier’s minimum order quantity is 300 pieces, this solution would lose some of its benefits. It’s usually not a problem if this is the case for one or two Orderfree Supply Chain stock items, but if it applies to several items the solution requires the suppliers to hold excess stock.
- Consumption is very unstable or unpredictable. When the demand fluctuates a lot during a replenishment time-cycle, this solution becomes an expensive option for the supplier because overstock is inevitable in this situation. It is often the case that consumption levels are relatively stable for most of the year and fluctuations only happen in certain periods. If that is the case, Orderfree Supply Chain solutions are still good options as they then only require stock management fine-tuning during the unstable periods.
- A retailer wants an Orderfree Supply Chain olution to support campaign sales without taking any risk. If a retailer wants an Orderfree Supply Chain product to be available during an entire campaign period but is unable to make a reliable prediction of the demand, the supplier ends up taking a significant risk. Also, this solution isn’t beneficial to suppliers in this situation as the products are only sold during a limited campaign period.
In this blog post we have only scratched the surface of the benefits and constraints of these solutions. Based on observations of thousands of Orderfree Supply Chain solution implementations, it’s clear that when a supplier’s role changes from being a passive provider of goods to a proactive Orderfree Supply Chain provider, supply planning and stock management increases. The supply chain becomes more effective and waste is reduced. This solution gives suppliers the opportunity to become even better partners with their clients and thus create even more value. These topics will be discussed in greater detail in our next blog post.