For most retailers, supply chain efficiency is crucial to lowering costs, maintaining customer satisfaction, and improving inventory levels. Vendor-managed inventory (VMI) agreements between retailers and vendors can help you address supply chain inefficiencies because they allow retailers to have better control over changing market conditions. The vendor produces smaller, predictable batches, which makes the inventory more constant.

Using a VMI scenario between a vendor and a retailer, in which the retailer initiates the VMI agreement with the vendor, we’ll show you the minimal master data setup and configuration settings retailers need to configure VMI in their SAP ERP systems. Then we’ll discuss how to schedule material requirements planning (MRP) and offer some tips for executing VMI. This article applies to mySAP ERP 2004 and SAP ERP 6.0, although the functionality is similar in R/3.

Pre-Configuration Master Data Settings for VMI

Both the VMI replenishment and delivery processes require retailers to adjust the following three key settings in their master data. First, you need to configure the material master, which alerts your system so that it can stock and procure VMI material through MRP. In this step you also indicate how the system should consume material from stock (e.g., company-owned consumption before vendor-owned consumption).

Second, we’ll discuss purchasing info records, which distinguish how your system should procure VMI material (e.g., planned delivery time, pricing, and under- and over-delivery tolerances). Third, we’ll address the source list, which shows which vendors you use to procure a given material.

You maintain these settings via transaction MM02. If a view does not already exist for a given material, use transaction MM01 to create the view.

Material Master Settings

Step 1. Define the item category. In the Sales: sales org. 2 tab, change the Item category group to NORM to receive stocked material from the vendor (Figure 1).

Figure 1

Use transaction MM02 to specify the item category group

Step 2. Enter required data. Switch to the MRP 1 tab (Figure 2). Ensure that the required MRP Type field is set to PD, which indicates a standard MRP-based procurement process. Next, specify the Lot size period (e.g., daily, monthly, or lot to lot). This field indicates which procedure your SAP system should use to determine how much stock to order or make through MRP. In our example, we set the lot size to WB (weekly).

Figure 2

Configure the MRP 1 view of your material master

Step 3. Populate key fields. Go to the MRP 2 tab to configure the Special procurement, stock determination group (Stock det. grp), and Safety stock fields (Figure 3). For our example, the VMI process includes the consignment process, which is one of the ways you can define how the vendor manages the retailer’s inventory. In this case, the vendor is involved in the inventory assignment, but it does not own the inventory. The 10 value in the Special procurement field indicates that the material is consigned and then MRP procures the consigned inventory.

Figure 3

Configure the MRP 2 view of your material master

The Stock det. grp. field informs SAP ERP which stocks it should consume first if you stock VMI alongside company-owned inventory. We describe the configuration for the stock determination group in greater detail in the configuration section of this article.

Lastly, the Safety stock field notifies SAP ERP how much inventory (e.g., 20 units) should always remain on hand and available-to-promise. When you set this field, SAP ERP maintains VMI at a minimum stock level equal to the safety stock value specified in the MRP 2 view.

Other fields relevant to VMI in the MRP 2 view include:

• Procurement type, which indicates whether an item is procured or produced
• Storage loc. for EP (external procurement), which designates where a material should be received for purchase orders
• Plnd delivery time, which indicates how many days are required to procure an item

Step 4. Determine availability setting. To conclude the material master configuration, go to the MRP 3 tab. The Available to check field directs how SAP ERP handles the inventory. For example, you can specify whether the system considers open purchase orders in the availability check or whether it generates individual or summarized requirements. When you finish configuring these four steps, click on the save icon to update your material master.

Purchasing Info Record

Purchasing info record is the second level of VMI master data that requires attention. It collects information about how you procure a certain material from a particular vendor, such as the planned delivery time, under- and over-delivery tolerances pricing, and shipping instructions. Use transaction ME11 to create the info record.

First you must specify the VMI process to use. We are using a consignment example, so in the initial screen that appears, select the Consignment indicator in the Info category section.

Next, execute transaction ME12 to set up VMI in the purchasing info record (Figure 4). In this screen, enter the net price, purchasing org, confirmation control, and shipping instructions. The Net price field indicates the price paid to the supplier once the vendor-owned material is delivered to the end customer, and is defaulted automatically. The Purchasing Org. field defines who is responsible for the material. The Conf. Ctrl. field indicates which confirmations (e.g., shipping notification) are required. The Shp.Instr. field specifies how the vendor should pack and ship the material.

Figure 4

Update the necessary purchasing info record fields to support VMI

Source List

The third level of VMI master data configuration is to check the source list in transaction ME01. Ensure that the vendor exists in the source list and that the appropriate MRP indicator set by your company appears in the MRP field (Figure 5). The MRP indicator in the source list places the default supplier on the purchase requisition.

Figure 5

Maintain the source list

VMI Configuration

Now that your master data is set up, you can configure VMI. Follow menu path Materials Management>Inventory Management and Physical Inventory>Stock Determination>Define Strategies for Stock Determination or use transaction OSPX. Figure 6 shows the stock determination groups and relevant assigned plants. The stock determination group, which is determined in the MRP2 view of the material master, appears in this screen.

Figure 6

Overview of stock determination groups

The Stock determination rule folder in the Dialog Structure on the left side of the screen allows the user to enter stock determination rules. The system combines the stock determination rule with the stock determination group and its assigned plant in the Stock Determination Header Table folder (Figure 7). Here you set advanced stock determination settings, which include sorting stock by item number, price, or quantity and providing additional control over which material is consumed first. For example, if the highest cost items should be consumed first, the price field can be sorted descending so higher cost items are consumed before lower cost items.

Figure 7

Advanced stock determination settings

The stock determination header table also allows stock determination to override first in first out (FIFO). For example, you can set up the system to consume higher value items before FIFO would otherwise suggest. In this manner, you can instruct your system to pick items first by their relative value or their quantity, rather than relying on FIFO to pick the oldest items first.

Lastly, in the Stock Determination Item Table folder, you can designate that the system should consume material with a particular special stock indicator before other material (Figure 8). For example, you can configure your system to consume company-owned inventory before vendor-managed inventory. One advantage of this scenario is inventory holding costs are reduced by consuming company-owned inventory before VMI.

Figure 8

Stock determination item table settings

Schedule MRP and Set Up Purchase Order Creation

After you set up the master data, configure VMI, and have stock available, use transaction MD01 to schedule MRP on a regular basis (e.g., daily or weekly) for all MRP-relevant materials. This process determines material requirements as orders are fulfilled. The MRP run creates a purchasing requisition using the special item category K, which denotes VMI material. A purchasing requisition includes data such as proper quantities, plant address, and requested delivery date, allowing users to review criteria prior to generating a purchase order.

You can create purchase orders (POs) automatically or manually, depending on the business requirement and the desired level of control. For example, you can use transaction ME59 to schedule POs as needed automatically (e.g., once or multiple times per day). This is useful when purchase order creation doesn’t require manual intervention for error checking or approval. If users convert requisitions to purchase orders manually, use transaction ME58. This option is useful when buyers must approve the purchase requisitions before they are sent to the vendor.

The purchase orders created via MRP are not used to purchase materials. Their purpose is to notify the vendor (supplier) of additional inventory needs. Payment for the material does not involve purchase orders and occurs when VMI is consumed.

Tips for VMI Execution

When all the VMI setup is complete, consider the following tips to run your business with VMI.

Tip 1. Use transaction MIGO in SAP ERP to receive material against the consignment PO into supplier- owned inventory. This process is the same as the one you use when you receive company-owned stock against the replenishment purchase order. Use the goods movement type 101 to receive VMI stock in your inventory. If the warehouse is managed by SAP Warehouse Management (WM), use transaction LT06 to transfer the material from the receiving dock to the storage bin after you receive the material against the purchase order.

Tip 2. Use sales orders to consume VMI. To do this, create the sales order via transaction VA01 or automatically initiate a sales order from the customer’s electronic data interchange (EDI) 850 feed. Creating a sales order triggers SAP ERP to perform an available-to-promise (ATP) check against both company- owned and VMI. ATP determines if the order can be fulfilled for the customer’s requested delivery date.

Tip 3. Use just one delivery document. When a sales order is ready to deliver to a customer, you can create one delivery document for the entire order, which includes both company-owned and VMI items. The stock determination group in the material master MRP2 view controls delivery priorities.

Tip 4. Understand the accounting document. Vendors use the accounting document to view AP payables that are compensated to the supplier for consuming the vendor-owned inventory. The system creates this document automatically when the goods issue is posted against the delivery (Figure 9).

Figure 9

Display material documents overview

In Item 1, the description AP Other Payables contains 500.00. The system generates the value in the Amount field using the net price of the purchasing info record (125.00) multiplied by the number of materials goods issued on the material document (4).

In transaction MB51, the material for line item 10 is obtained both from company-owned stock and VMI, in our example (Figure 10). Value K in the Special Stock field indicates VMI and a blank entry denotes company-owned inventory was consumed.

Figure 10

Material document details

Bruce Rishel

Bruce Rishel is a partner with Venetia Systems. He has earned the APICS Certified Supply Chain Professional (CSCP) certification as well as the Project Management Institute’s Project Management Professional (PMP) designation. Since 1998, Bruce has served his clients in a number of roles including both functional and technical leads and as a project manager. Bruce helps companies develop and improve logistics and supply chain processes and specializes in implementing the LE module, including WM and TM. Bruce has considerable experience integrating external logistics systems with SAP and is an expert in the SAP XSI solution facilitating SAP communication with third-party transportation providers. In addition to his client experience, Bruce is a frequent contributor to SCM Expert and speaker at SAP’s SAPPHIRE conference. He continues to work hands on, helping his clients realize their potential.

You may contact the author at bruce.rishel@venetiasystems.com.

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