Seagate Technology has reinvented itself several times since its founding in 1979. Seagate is now the largest disk drive manufacturer in the world with $8 billion in revenue. It was also one of many of the disk drive suppliers that were impacted by devastating floods in Thailand in 2011.
Although not directly a result of the floods, Seagate has been moving toward a vendor-managed inventory (VMI/SMI) program as part of an effort to transition to a “demand-driven” supply chain, according to a case study by e2open. By 2014, Seagate made Supply Chain Insight’s list of Supply Chains to Admire.
Like many OEMs, Seagate uses hundreds of suppliers. Each day it consumes 90 million parts from its suppliers. Also, like many OEMs, Seagate serves a customer base that changes its products and demands almost weekly.
VMI/SMI is a process in which a supplier allocates inventory for a customer based on forecasted demand, but the customer pulls that inventory based only on actual demand. E2open recommends the key requirements for an effective VMI/SMI program include:
- Delivery of materials triggered by actual demand
- Suppliers allocate, hold, and manage inventory based on continuous forecast
- Physically, the inventory can be located and managed using a number of methods, including on-site supplier store, third-party logistics provider (3PL) warehouse, or supplier warehouse. The key element being that the inventory is staged within close proximity of consumption
- Agreements signed between customer and supplier at the part number level identifying flexibility and liability parameters based on the customer forecast.
- Where applicable, the supplier is the importer of record into the country of intended consumption by customer, with ownership transferring upon receipt to customer
E2open, among its service offerings, enables real-time communication across supply chain networks. The company also provides products and services that automate tasks. According to e2open, an effective VMI/SMI program requires:
- A single, comprehensive shared system which stores and manages all transactions and data across the entire process between customers, suppliers and 3PLs.
- Real-time visibility across all participants in the supply chain to inventory levels at all locations, and material movements to and from these locations.
- Automation of most process steps so that only exceptions require human intervention
- An effective set of metrics and dashboards
One of Seagate’s problems was a 30-day replenishment cycle that involved manually entering customer pulls into the ERP system on a weekly basis. This was followed by an inventory evaluation and a manual planning system, followed by master schedule updates which were sent to the factories where executives would need to meet, analyze and issue response to these updates. The factory committed to the updates which were then updated in the master schedule, and a new 13-week commit schedule was issued. The factory would then build the product, pack and ship, and send it to the hub.
The pace at which the information was exchanged and executed was simply too slow to optimally manage inventory. Process redesign and automation helped speed up the process. According to e2open, Seagate’s customer now sends a signal to pull a part from the VMI/SMI hub that Seagate operates on behalf of its customers. If finished goods inventory drops too low in the JIT hub, a signal is sent to Seagate’s plants, which send a signal to the VMI/SMI hub for components, which in turn sends a signal to Seagate’s suppliers. Material is then shipped to the 3PL VMI/SMI hubs and on to Seagate’s plants, which builds the finished good product for shipping to the customer-facing JIT hub. As a result of its real-time exchange of actual pull information, Seagate can now build to actual pulls while planning to forecast.
Seagate’s implementation of a demand-driven supply network enabled it to:
- Grow volume from four to 25 million units per quarter, while head count for inbound supply chain processing was cut by 50 percent
- Increase inventory turns from 8 to 16
- Eliminate critical part shortages
- Improve customer satisfaction
The entire case study can be found here.