This is the first of series of articles covering Vendor Managed Inventory and Consignment Stock. The solar industry will serve as one example in this series providing some concrete use cases as will e-commerce use cases. So, let’s get to it!
In Europe, especially countries like Germany and the Netherlands, the segment for residential roof-top installations is contributing a significant percentage to the overall newly installed PV capacity. On first glance, manufacturers should benefit from the higher margins coming from the smaller order sizes. As usual things are not as easy as they seem.
So, what are the issues large manufacturers are facing? And how is this related to Vendor Managed Inventory and consignment stock?
Challenges for Manufacturers
First, let’s take a look at the particular challenges manufacturers are facing in this segment. Historically, up to 2018 when the minimum import prices and anti-dumping tariffs were lifted, importing solar modules into the European Union was a complicated affaire to put it mildly. While this had all kinds of consequences for the European solar market, it particularly hurt the market for roof-top installations. Importing smaller volumes was not feasible. Importing larger volumes became the domain of manufacturers or large, specialized importers. As roof-top solar has small average order sizes, it depended on these importers.
Another issue is of strategic nature for manufacturers. They have to utilize their manufacturing capacities, utility scale projects in large markets are naturally making this a lot easier. As a result, all logistics and supply chain operations of manufacturers are geared towards these market segments and specialized for FTL and FCL shipments. The more complex deliveries for roof top installations representing only a sub-segment of a comparatively small market fall far outside standard operations. Setting up the sales and logistics operations in Europe competes with the established ones for project costumers. The result is a multi-level distribution chain between the manufacturers and the local installer, driving prices and lead-times up.
Vendor Managed Inventory and Consignment Stock
These two concepts can be either be applied together or separately. Under VMI, the vendor is managing inventory levels on his customers behalf making him independent from fixed order sizes and hard delivery dates. This vastly increases the vendor’s flexibility. Consignment stock means that the inventory is owned by the vendor until the customer withdraws goods from inventory. This inventory is reserved for that particular customer. Usually inventory is held at a customer’s facility reducing the vendor’s logistics costs but potentially increasing his inventory levels because his customer controls the inventory level to large extent.
Regardless of who actually owns the inventory, the big benefit of both solutions is the overall reduction of inventory levels between the two parties. Usually both, vendor and customer, are holding buffer stocks of some kind to cover for delivery delays and demand fluctuations. Whether these buffers are actual safety stocks or time buffers is not relevant at this point. By applying VMI and / or consignment stock these two different buffers are combined into one, at this time closely monitored and controlled, buffer stock at a specified location and with clearly defined limits. Thus, overall inventory levels decrease while service levels increase.
Consigned VMI, combining the two concepts, can be the most beneficial set-up for both vendor and customer. It is also requiring the highest level of collaboration between the two parties.
Vendor Managed Inventory has to be based on regular forecast, consignment stock can work without a forecast and use regular purchase orders. As this would benefit mostly the customer, using a forecast based procurement set-up comes closer to the collaborative idea of both VMI and consignment stock.
Consignment, VMI and Roof-Top Solar
How can these two concepts benefit importers and manufacturers? As mentioned, the logistics operations needed to reliably serve the residential market are different to those required to serve the market for utility scale solar. The latter is already served by manufacturers and EPCs while the first is served by resellers. Manufacturers can benefit by implementing consignment stocks and VMI solutions with various resellers and the resulting strategic partnerships. This makes the roof-top market much more accessible and circumvents the existing multi-level distribution chain. Resellers on the other hand may benefit from an increased availability and lower prices as they are directly working with manufacturers. Implemented and managed well, inventory levels will decrease along the whole value chain and both, the resellers and manufacturers market share will increase.