What is Direct Line Feed (DLF)
DLF does not have a precise definition in the academic world. However, it is often mixed with vendor-managed inventory (VMI). However, the perspective can be much broader. Usually, DLF is provided by a vendor to customers in so-called “All-inclusive” contracts, where the vendor takes care of replenishments directly at the point of consumption. Availability and transaction costs have a significant impact on item costs. This business model is typical, for example, for fasteners and some other indirect categories like health and safety items.
Many LEAN -tools support DLF. Kanban cards can guide components and flow, or the pull flow principle can control the process. Toyota Production System has been used for decades as a master source for the LEAN strategy. It has been the original model for building an effective and high-quality production process. Material flow is designed to feed the correct consumption at the right time. To achieve the highest accuracy of the resource utilisation, levelling of the material flow is required. From the material management point of view, DLF is seen as one of the processes that create material availability for production.
DLF and procurement process
In procurement, production materials can be divided into three categories based on the differences in required engineering work, consumption fluctuation, and material costs.
Items with a high level of engineering require procurement to take an active role. The share of customized engineering work must be considered, in addition to the item costs. This category requires frequent bidding activity. Due to their non-standardized product features, these items might not be suitable for DLF.
The second group includes standard items with fluctuating consumption levels. Raw material costs have a big impact on the item price. Typically, these items are stainless steel components or castings, where alloy surcharges affect the total price. Procurement usually involves bidding rounds among several accepted suppliers.
The third group consist of items with low value and high availability requirements. Usually, these are fasteners and other items that keep the production process rolling. Without these so-called MRO items, the delay in the process might have costly consequences. Vendor transaction costs significantly impact item pricing to provide the needed availability level. Thus, significant value is placed on this replenishment process and product features. Typically, vendors offer several options to build a direct replenishment process for customers. Usually, pricing is “All in” type with delivery term DLF.
What if the buyer owns DLF?
LEAN is teaching us to collaborate closely with the vendors. The goal is to develop the process by avoiding waste. And so build process competitiveness against competitors' processes. Often, DLF is applied where the service part creates value for the low-value items. Sometimes, even 70-80% of the total item costs. Vendors also try to lock the customer relationship with their own vertical delivery method, for example, by introducing technical solutions for DLF that are closed for other vendors. Thus making it hard to break down the pricing structure and organise a proper tender process.
Could the buyer direct its own line feed, and how would managing these items make a difference? The costs of DLF, the replenishment process, and material management are the buyer’s responsibility. The business case depends on the category's spending and negotiation position at the supplier market to really understand pricing for the delivery term “DLF.”
When the ownership of the DLF process is on the buyer’s side, relevant resources in procurement activities are required. To achieve better cost control and process efficiency, active development is needed. This approach is often in conflict with MRO vendor interests. However, the gains might be substantial. Then, it is possible to organize RFQ rounds at relatively low procurement costs. Changes to the supplier base are more manageable as the differentiating replenishment processes are excluded in bidding, which might not be in the interest of MRO vendors. This sets specific requirements for the buyer. One must know the items, their features and material differences. Also, there must be a willingness to change the process and take the related risks. Naturally, item pricing must reflect the new delivery term.
DLF in future
Delivery times get faster; batch sizes get smaller, which requires regional fulfilment centres with efficient delivery processes.
Evolving material management tools and automation can challenge DLF ownership and the business case of the MRO vendors. Rising volumes in global e-commerce are pushing parcel logistics service providers to develop their services in consumer markets. Delivery times get faster, batch sizes get smaller which require regional fulfilment centres with efficient delivery process. This also creates pressure on the industrial side too. One way to implement DLF more efficiently is to establish more prominent hubs that provide replenishment service for a single factory with good response times and reasonable costs. Future will show, how buyers’ increasing control over the process challenges the local MRO vendors’ branches.
When looking for alternatives for DLF technology, challenge your current knowledge. Make sure to check the latest in the market: Agilon® automated warehouse - manage and handle thousands of packages efficiently | Konecranes
Vesa Hämetvaara, Director, Agilon Business
Konecranes Agilon
[email protected]
Veli-Pekka Vuoti
Director, Operations, Konecranes Agilon
[email protected]
