Your System – Not Guilty As Charged

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The Internet of Things (IOT) aids in Vendor Management Inventory (VMI) of Maintenance Supplies

Posted by Joel Schipper on August 23, 2016


Maintenance supply inventories are often kept in a parts crib, which is a separate stockroom that only handles these items. Some parts cribs are unattended. In that case, how can the maintenance team (also known as the capital asset management group) know that all consumption of parts is recorded, and that the correct levels of inventory will always be on hand. The answer lies in part with vendor managed inventories (“VMI”) and in part with the Internet of Things (IOT).

To avoid having maintenance workers simply take parts, many small parts are stored in vending machines, similar to soft drink vending machines or the “traveler’s needs” vending machines seen in airports. A worker comes up to a machine, selects the part they need, such as saw blade, and uses a keypad to enter the number of the maintenance work order to which the issued quantity will be charged. The machine then dispenses the part, and records the issue. This satisfies the Accounting department, and also is a first step in automating the replenishment process.

Of course, a key consideration is that there should never be a “stock out” when a worker needs a part; that’s where vendor managed inventory comes into play. In the simplest scenario, the parts supplier (vendor) sends someone regularly to check on the machines and physically resupply all parts up to the maximum (or agreed upon level) that should be in the machine. These parts are “consigned” to the machine, and therefore to the customer who is operating the parts crib. Only when the parts are issued, and charged to a work order, will the customer pay the vendor for the parts used.

In a planned preventative maintenance situation, the needed part will likely be on a parts list attached to the work order. In a break-and-fix situation, the needed part will not be on the parts list ahead of time, but still needs to be issued and charged to the work order. If the worker is somehow trying to get the part without a work order being generated, there still needs to be a mechanism, such as departmental “charge card” or standing work order that can be used to record the issue.

Since we know that part of the cost of a part reflects the paperwork costs required to buy and pay for and replenish the inventory in a VMI situation, we want to do everything possible to reduce this paperwork, and thus the “friction” in the transaction. The less effort that is not value-added, the lower the potential purchase price of the part after negotiation.

The first step in reducing this paperwork is to have the vending machine “write” an issue transaction to the maintenance or ERP system using common interface protocols. In the case of one ERP system (Oracle’s JD Edwards EnterpriseOne), a flag on the item master is set to indicate that a part can be issued, and immediately, automatically “received” against an open purchase order. This is a simultaneous issue-and-receive situation that lowers processing time and cost by the consuming organization. Since that purchase order is likely set to be for a year’s time period, it also lowers the cost for the vendor.

Finally, a function available in some ERP systems called “evaluated receipts” is run nightly that processes these issue-and-receive transactions into outstanding Accounts Payable transactions that are approved and ready to pay. Using wire transfer payment methods, these automatically approved transactions are paid without further intervention. So there’s a reduction of handling on the part of the consuming organization, and less handling, as well as automatic payment, to the vendor.

The result: less effort for everyone involved, and a chance to negotiate a lower win-win cost on the part. I would suggest that 1% is a reasonable cost reduction based upon my own experience that even performing periodic requests for quotation can result in 2-3% cost reductions.

Taking this one step further, the supplying vendor has a notification that a part has been consumed. If they can track the “paper inventory” left in the vending machine, they can become more accurate in resupplying the vending machines, with less on-site people effort. To the consuming maintenance organization, this improves the chance of eliminating a stock-out, and also is a one-time cash flow improvement since the replenishment purchases are made one unit at a time rather than in a larger reorder-point driven replenishment order. I would suggest this could result in a one-time 30 day cash flow savings.

And the lower chance of a stock-out can mean valuable additional days of “up-time” and production, and perhaps improved safety, for the consuming organization.

And … There’s the intangible benefit of this being “easy” for everyone involved. It does involve a true trust relationship between supplier and consumer that takes time and care to develop.

How does the Internet of Things come into play here? Think about if you’ve been in a parking garage that has a red or green light showing over each parking space. That’s driven by a simple laser beam that detects whether a car is in or not in that space. A similar laser beam can be installed in each slot of the vending machine at the point where the remaining quantity of parts triggers a reorder signal to the vendor. So when the quantity of parts remaining in a particular slot of the vending machine is small enough to allow that slot’s laser beam to shine through to it’s receptor, the machine can transmit a signal to a collector or “orchestrator” that translates that signal into a reorder request for that part from the supplier.

The supplier can receive these signals and dispatch a predetermined reorder or refill quantity to the consuming location. Perhaps the consuming organization will be allowed to perform the refill, even further lowering the need for the supplier to send personnel on-site, and reduce the visits of those personnel to predetermined “cycle count” visits to ensure that the machines and the refills are working properly.

This is very similar to a “kanban” system whereby a predetermined low quantity kicks off a request to a vendor to deliver a predetermined amount of replenishment inventory.

In the case the supplier has software that performs “outbound inventory management” (as would be the case with Oracle’s JD Edwards EnterpriseOne ERP), then each consignment shipment of inventory is recorded as being held by a particular supplier, and even a slot in a vending machine. And each notice of consumption reduces that inventory. And when the predetermined reorder point level of inventory is reached, the software initiates a replenishment shipment — even without an IOT transaction.

Another variation on this system is where the vending machines are unlocked, but the entire parts crib requires a secure entry and exit. In that case, each part has an RFID tag, and the worker cannot exit the secure area without entering a work order number that will be automatically related to the RFID of the part or parts attempting an exit with the worker. This further reduces the effort involved, and the consuming organization can perform all the parts bin refills when the replenishment quantities show up on their dock.

In short, this is a good example of how a system can do more than you thought it could, and if you’ve been complaining about your system, it’s another chance to say your system is “Not Guilty As Charged.”

Note: A presentation on this topic was made recently at the Quest Direct INFOCUS 2016 conference in Denver by myself and Scott Hollowell, CEO and Director of Services of Asset Management Systems, LLC (info@amseam.com). We hope to reprise this talk at Quest’s Collaborate 2017 conference in Las Vegas in April of 2017.  The presentation is here

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