Vendor managed inventory ppt

Strategic Partnering:Strategic Partnering:Types of SPTypes of SP

• Quick Response: – Vendors receive POS data from retailers, and use

this information to synchronize production and inventory activities at the supplier.

– The retailer still prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.

– Example: Milliken and Company: The lead time from order receipt at Milliken’s textile plants to final clothing receipt at several of the department stores involved was reduced from eighteen weeks down to three weeks.

• Continuous Replenishment: Vendors receive POS data and use it to prepare shipments at previously agreed upon intervals to maintain agreed to levels of inventory.– Wal-Mart, Kmart

• Advanced Continuous Replenishment: Suppliers may gradually decrease inventory levels at the retailer’s store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way.– Kmart


• Vendor Managed Inventory (VMI):JITD– VMI Projects at Dillard Department

Stores, J.C. Penney, and Wal-Mart have shown sales increases of 20 to 25 percent, and 30 percent inventory turnover improvements.


Advantages of SPAdvantages of SP

• Decrease required inventory levels

• Improve service levels• Decrease work duplication• Improve forecasts

Advantages of SPAdvantages of SP• Fully utilize system knowledge

– Consider the partnership between White-Hall Robbins (W-R), who makes over-the-counter drugs such as Advil, and Kmart. W-R initially disagreed with Kmart about forecasts, and in this case, it turned out that W-R forecasts were more accurate because they have a much more extensive knowledge of their products than Kmart does.

Disadvantages of SPDisadvantages of SP• Expensive advanced technology is

required.• Supplier/retailer trust must be

developed.• Supplier responsibility increases.• Expenses at the supplier often

increase.– Why? How can this be

addressed?

Conceptual Evolution of Conceptual Evolution of Inventory ManagementInventory Management

Owner Managed Inventory

Direct SellingConsignment

SellingVMIContinuous

Replenishment

Vendor Managed InventoryVendor Managed Inventory (VMI) (VMI)

VMI is essentially an integrated VMI is essentially an integrated approach whereby the inventory approach whereby the inventory

at the distributor/retailer at the distributor/retailer (downstream) is monitored and (downstream) is monitored and

managed by the managed by the manufacturer/vendor (upstream)manufacturer/vendor (upstream)

VMI rationale ….VMI rationale ….By pushing the decision making By pushing the decision making

responsibility further up the supply responsibility further up the supply chain, the manufacturer/vendor will be chain, the manufacturer/vendor will be

in a better position to support the in a better position to support the objectives of the entire integrated objectives of the entire integrated

supply chain resulting in sustainable supply chain resulting in sustainable competitive advantagecompetitive advantage

VMI includes …VMI includes …• Determining appropriate order

quantities• Managing proper product mixes• Configuring appropriate safety stock

Typical Benefits to Typical Benefits to ManufacturersManufacturers

• Lower inventory investments (raw and finished)

• Better scheduling and planning• Better market information• Closer customer ties and preferred

status

Typical Benefits to RetailersTypical Benefits to Retailers• Fewer stock-out with higher

inventory turnover• Better market information• More optimal product mix• Less inventory in channels (transfer

costs)• Lower administrative replenishment

costs

VMI Success FactorsVMI Success Factors

• Top management commitment• Focus on effort• Trust and partnership between supply

chain stakeholders• Highly effective computer/information

systems (EDI, Bar coding, Scanning)• Competent manufacturers and the ability

to forecast• Willing stakeholders partners and

patience

Electronic Data Electronic Data Interchange EDIInterchange EDI

computer to computer computer to computer exchange of business exchange of business

transaction in a standard transaction in a standard formatformat

EDI Benefits …EDI Benefits …• Quick access to information• Reduced labor and material costs

associated with handling paper-based business transaction

• Better communication• Increases productivity• Improved tracing and expediting• Improved billing• Better customer service

Ownership of inventoryOwnership of inventory• Initially, ownership transferred to retailer

upon receipt of goods• Now, VMI is based on consignment

relationship in which manufacturer owns goods until sold

• Retailer benefit: lower inventory cost• Manufacturers benefits: better control• Supply chain benefit: system-wide cost

reduction

Requirements for Effective SPRequirements for Effective SP• Advanced information systems• Top management commitment

– Information must be shared– Power and responsibility within an organization

might change (for example, contact with customers switches from sales and marketing to logistics)

• Mutual trust– Information sharing– Management of the entire supply chain– Initial loss of revenues

Important SP IssuesImportant SP Issues• Inventory ownership:

– Retailer owns inventory– Supplier owns the goods until they are

sold (consignment)• Why would a firm do this?

• Performance measures: Fill rate, inventory level, inventory turns

Important SP IssuesImportant SP Issues• Confidentiality• Communication and cooperation

– When First Brands started partnering with Kmart, Kmart often claimed that its supplier was not living up to its agreement to keep two weeks of inventory at all times. It turned out that this was due to the fact that the two companies employed different forecasting methods.

Steps in SP ImplementationSteps in SP Implementation• Contractual negotiations

– Ownership– Credit terms– Ordering decisions– Performance measures

• Develop or integrate information systems• Develop effective forecasting techniques• Develop a tactical decision support tool to

assist in coordinating inventory management and transportation policies

Main Characteristics of SPMain Characteristics of SP

CriteriaTypes

DecisionMaker

InventoryOwnership

New SkillsEmployed by vendors

QuickResponse

Retailer Retailer Forecasting Skills

ContinuousReplenishment

Contractually Agreedto Levels

EitherParty

Forecasting &Inventory Control

AdvancedContinuous

Replenishment

Contractually agreedto & ContinuouslyImproved Levels

EitherParty

Forecasting &Inventory Control

VMI Vendor EitherParty

RetailManagement

Examples of SP Successes Examples of SP Successes and Failuresand Failures

• Western Publishing-Golden Books:– Western Publishing is using VMI for its Golden Books line

of children’s books at several retailers.– POS data automatically triggers re-orders when

inventory falls below a reorder point.– This inventory is delivered either to a distribution center,

or in many cases, directly to the store.– Ownership of the books shifts to the retailer once

deliveries have been made.– In the case of Toys R Us, the company has even

managed the entire book section for the retailer, including inventory from suppliers other than Western Publishing.

– Extra sales, increased costs to Western


• VF Corporation’s Market Response System:– The VF Corporation, which has many well known

brand names (including Wrangler, Lee, Girbaud, and many others), began its VMI program in 1989.

– Currently, about 40 percent of its production is handled using some type of automatic replenishment scheme.

– This is particularly notable because the program encompasses 350 different retailers, 40,000 store locations, and more than 15 million replenishment levels.

– VF’s program is considered one of the most successful in the apparel industry.


• Spartan Stores– Spartan Stores, a grocery chain, shut down

its VMI effort about one year after its inception.

– One problem was that buyers were not spending any less time on reorders than they did before

– This was because they didn’t trust the suppliers enough to be able to stop carefully monitoring the inventories and deliveries of the VMI items, and intervening at the slightest hint of trouble.


• Spartan Stores (continued)– Suppliers didn’t do much to allay these

fears. The problems were not with the suppliers’ forecasts; instead, they were due to the suppliers’ inability to deal with promotions, which are a key part of the grocery business.

– Since they were unable to appropriately account for promotions, delivery levels were often unacceptably low during these periods of peak demand.

Distributor IntegrationDistributor Integration• Parts are shared across the distributor network• Specialized service requests are steered to

appropriate dealers or distributors.• What is required?

– Trust– Pledges– Guarantees from the manufacturer– Advanced information systems

• Disadvantages– Incentives for dealers – are they giving away

competitive advantages?– Skills and responsibilities are taken from some

dealers/distributors.• Examples - Caterpillar, Okuma

Business

Vendor managed inventory ppt