VMI in Apparel Manufacturing: Unheard off but Unattainable Too? Prabir Jana, Prof. Prabir Banerjee and Dr. Alistair Knox The article is based on annual research carried out at GMT Department, NIFT, India during 2001-02 sponsored by Creative Garments, India. This is part of doctoral research by Prabir Jana at Nottingham Trent University, UK. Introduction Vendor-managed inventory (VMI) is sweeping through many areas of retail today as the next step in supply chain management. Retailers, particularly those in commodity markets, see it as essential technique to reduce inventory and apparel retailers are no exception either. In principle VMI increase sales by avoiding out-of-stocks on in-demand products, and reduce losses from overstocks of products that no longer sell. Although VMI is usually practiced between a manufacturer or middleman and a retailer, it can also automate just-in-time delivery of supplies and parts to the manufacturer by its suppliers [1]. VMI is even practiced in electronics industry between final assemblers and part suppliers [2], however there is no evidence of VMI between apparel manufacturers and raw material suppliers. This article explores the potential of VMI in apparel manufacturing environment with supporting cases. What is VMI? Vendor Managed Inventory (VMI) is essentially a distribution channel operating system whereby the inventory at the distributor/retailer (dist/ret) end is monitored and managed by the manufacturer/vendor (mfg/vend) [3]. It includes several tactical activities including, determining appropriate order quantities, managing proper product mixes, and configuring appropriate safety stock levels. The rationale is that by pushing the decision-making responsibility further up the supply chain, the manufacturer/vendor will be in a better position to support the objectives of the entire integrated supply chain resulting in a sustainable competitive advantage. Through access to the retailers’ sales data manufacturers can build to market demand, reacting faster to changing needs. Interestingly, the technical support needed for VMI—once EDI is in place—is actually fairly straightforward. It is the relationship that requires effort [4]. How is VMI different from traditional inventory management? VMI is typically the opposite of the inventory management approach taken by most organizations today. Currently, orders are pulled through the supply chain by each partner as inventory levels reach "replenishment/re-order" points. This historic approach only serves to incent channel partners to optimize their individual link in the supply chain at the expense of sub-optimizing the overall supply chain. VMI, on the other hand, works in the reverse to link partners together and to grant authority to the partner who is in the best position to make inventory replenishment decisions. This entity is usually the mfg/vend partner given its upstream position in the channel. The overall goal must be to support total value chain cost minimization by pushing decision making on replenishment activities furthest up the supply chain.

Why VMI? To reduce/share cost of inventory To reduce/share space requirement for inventory To cut down response (procurement) time To reduce/share uncertainty of type of merchandise requirement To reduce/share uncertainty of quantity of merchandise requirement Typical Benefits to manufacturer Typical Benefits to distributor/retailer • Lower inventory investment (raw and

finished) • Better scheduling and planning • Better market information • Closer customer ties and preferred status

• Fewer stock-outs with higher turnover • Better market information • More optimal product mixes • Less inventory in channel (transfer costs) • Lower administrative replenishment costs

Source: [1] Some of the successful VMI implementation in different industry: • At K-mart, customer service measures have gone form the high 80s to the high 90s.

Inventory turns on seasonal items have gone from 3 to between 10 and 11, and for the non-seasonal items form 12-15 to 17-20.

• ACE Hardware, the large hardware cooperative, has seen fill rates rise 4% to 96% in the past few years.

• Fred Meyer, the 131-unit chain of supercenters in the Pacific Northwest, reduced inventories 30% to 40%, while sales rose and service levels increased to 98%. This was due to a VMI program implemented with two key food vendors.

• WalMart and P&G have had a VMI program together for over ten years to manage the inventory and production of disposable diapers, with great success: turns doubled, WalMarts' operating costs fell, and P&G's market share grew (because WalMart gave it preferred shelf space).

VMI Application In Apparel Manufacturing VMI can be looked as a step beyond Just in Time (JIT) in manufacturing scenario. In JIT scenario vendor is supplying inventory to manufacturer Just in Time, whereas in VMI vendor is maintaining (means already supplied before time) inventory at manufacturer’s warehouse. In practice it is seen that JIT pushes the effects of unpredictability upstream in the supply chain [5]. While the manufacturer require to predict (forecast!) the demand for retailer, the consumable vendor further up in the supply chain can simply calculate the requirement for manufacturer; this is the key difference. The quality and quantity of merchandise in VMI are two very important (often disguised) parameters for VMI application in manufacturing. Unlike retail scenario where inventory has individual identity and is tracked by SKU, inventory at manufacturing level has two identities; quality and quantity. While predicting inventory at manufacturing level involves getting both quality and quantity right.

Some of the potential areas of VMI application in apparel manufacturing are procurement of the consumables i.e. the raw material and accessories as identified below.

1. Fabrics 2. Sewing thread 3. Sewing needle 4. Zippers 5. Sewing machine spare parts

The following table summaries the potential of each of the above-identified areas against different VMI parameters. Analysing different areas with VMI parameters Areas Cost

saving Space Saving

Response (procurement) time

Type of merchandise

Quantity of merchandise

Fabrics Substantial Substantial Substantial Uncertain Uncertain Sewing thread

Substantial Substantial Substantial Uncertain Certain??

Zippers

Substantial Substantial Substantial Certain Certain

Sewing Needle

Negligible Negligible Negligible Certain Uncertain

Spare parts

Negligible Negligible Substantial Uncertain Uncertain

For example practicing VMI between needle supplier and apparel manufacturer will have negligible cost and space saving to the manufacturer. Also it was felt by the manufacturer that current response time (procurement time) by needle vendor is fairly satisfactory and further improvement will not result any substantial benefit. VMI is also about accurate prediction of quality and quantity of merchandise by the vendor. While quality of merchandise (type of needle) can be easily predicted (certain), quantity (of needle) is uncertain and needs knowledgeable prediction by the needle vendor. In retail environment key to VMI implementation is successful prediction of right quantity and quality of merchandise. A sewing thread supplier can decide on type of thread and calculate fairly accurately the quantity required based on fabric swatch and apparel sample. The question is that in environments where prediction of right quality and quantity of merchandise is relatively easy (just calculation, no uncertanity!) whether VMI application will result any further advantages? Taking VMI in retail environment as benchmark, the similarity and disparity analysis for above five consumable supply environments were done. The comparative similarity or disparity will suggest respective ease or difficulty of implementation.

Areas Similarity with Retail environment

Disparity with Retail environment

Fabrics Like retail sales the actual consumption (type & quantity) pattern of fabric is difficult to predict

Sewing thread

Like retail sales the quantity of sewing thread is difficult to predict

Unlike retail sales the actual consumption (type of sewing thread) pattern of sewing thread can be accurately predicted.

Zippers

Unlike retail sales the consumption (type & quantity) pattern of zipper can be accurately predicted.

Sewing Needle

Like retail sales, companies those follow “break to replace” policy, sewing needle consumption (only quantity) pattern also can’t be predicted accurately.

Unlike retail sales the consumption (only type) pattern of sewing needle can be accurately predicted if company follow “fixed-life needle replacement” policy.

Spare parts

Like retail sales can’t be predicted with 100% accuracy, spare parts consumption (only quantity) pattern also can’t be predicted accurately for companies with “break to replace” policy.

Unlike retail sales the consumption (only type) pattern of sewing machine parts can be accurately predicted if company follow good preventive maintenance policy.

VMI Case Studies in Apparel manufacturing in India Case One: One apparel Manufacturer exporter from Bangalore wanted to experiment VMI concept (not in true sense using EDI) primarily for controlling sewing thread inventory. Sewing thread is a very important item in apparel manufacturing. The demand pattern (based on production schedule) was shared with thread manufacturer and mandate was to supply right quality and quantity of thread in right time. Thread supplier in consultation with apparel manufacturer calculated actual quantity of thread. Before implementation of the concept manufacturer used to calculate and order total quantity of thread and any surplus or shortage was headache of manufacturer. In the new concept the onus of surplus or shortage totally went to thread supplier. Somehow thread quantity calculation was never found to be accurate (with best of effort from both parties), resulting thread supplier has to bear the cost of surplus thread. Barring some standard colour like white or black, thread is perishable item so thread manufacturer withdraw from the arrangement. The apparel manufacturer went on to have a risk sharing agreement with another thread supplier and continued to work on the concept. In the new risk sharing agreement the cost of dispute/surplus quantity of thread is being shared by both thread supplier and apparel manufacturer.

Case Two: One apparel manufacturer in NCR (Northern Capital Region) have an JIT (Just In Time) delivery arrangement with a thread supplier. Under this arrangement the manufacturer block certain quantity of thread with the thread supplier. But thread inventory is maintained in thread supplier’s premises (instead of apparel manufacturer’s premises) and delivered Just-in-time when required by manufacturer. The blocking of quantity is valid for certain period only and beyond that the thread supplier is free to sell the thread to other manufacturer. This arrangement is made possible only because geographical proximity of both guaranteeing delivery within 8 hours. By this improvised arrangement [1] Thread supplier avoided complicated reverse entry of goods in case of surplus, if aroused. [2] Manufacturer avoided being left out with surplus stock, while being guaranteed against out of stock [3] Onus of calculating correct quantity is still remained with manufacturer This arrangement was continuing when the study was conducted. The Analysis Other products like zipper and needle was also explored among numerous manufacturers. Manufacturers felt those too insignificant to experiment. While needle and zipper supplier shown interest in exploring the possibility. One manufacturer shown interest on VMI arrangement with yarn and fabric supplier and the possibility is currently being discussed with the supplier. Gerber Technology, the renowned CAD/CAM solution provider for the sewn products industry launched a VMI programme in 1999 [6]. Under that pilot programme, Gerber’s service organization had partnered with several customers who have large cutter installations to maintain a new parts inventory at the customers site, resulting maximized customer “uptime” and reduced service related costs by Gerber. While exploring similar arrangement with the sewing machine spare parts supplier in India it was found that as exceptional cases similar practices were exercised with few large apparel manufacturer for selected high priced machines. Two reasons were identified as hindrance to make VMI as common practice. Firstly absence of large apparel manufacturers, the driver of VMI implementation, and secondly absence of principles of machine manufacturers. While the small scale apparel manufacturers can’t show their might to the spare part suppliers, the machinery agents are least bothered about developing a long term relation with the manufacturers. Conclusion According to Prof. Sunil Chopra VMI should only be implemented in cases where the mfg/vend can forecast demand more accurately than the dist/ret. It is commonsense that accessories and raw material supplier will be able to better forecast (sometimes just calculate) the demand for apparel manufacturers than manufacturers do it for retailers. Fabric (basic raw material) and sewing thread hold challenge due to unpredictability of demand, whereas needle, zipper, machine spare parts etc. have fairly stereotyped demand pattern and can be easily implemented. VMI presupposes EDI between the trading partners, and absence of EDI infrastructure will make the “time gain” factor difficult to appreciate (and convert to cost advantage) by partners. However, the emphasis is on the relationship, and the Software merely automates the demand analysis. The sales tax and other procedural complexity may need to be simplified for smooth flow of material and information between partners.

References: [1] Fernando del Cid, Roger Gordon, Brian Kearns, Paul Lennick, and Andreas Sattleberger under the supervision of Sunil Chopra, Professor of Operations Management, J. L. Kellogg Graduate School of Management, Northwestern University. [2] Duncan, R. Logistics: Trading Places. Engineering, Nov’96 [3] "State of a New Art." Manufacturing Systems (Master the Supply-Change Challenge Supplement), pp.: 2-10, August 1995. [4] G. BERTON LATAMORE, Customers, Suppliers Drawing Closer through VMI Relationships, APICS -- The Performance Advantage, July 1999, Volume 12, No. 7 [5] Mallman, D.L., “The strategic role of suppliers in manufacturing strategies”, proceeding of the 2nd international symposium on logistics, Nottingham, 1995, pp.3-8. [6] News Release, JIAM Show 1999, Gerber Technology