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The question that always has nagged vendor-managed inventory is whether these programs actually reduce inventory in the supply chain or merely push it back onto suppliers, who often have a higher cost of capital than do their market-dominating customers.
"Burden-shifting" is an issue that remains contentious, especially between manufacturers and component suppliers. But according to a recent survey by AMR Research, Boston, suppliers in the retail sector increasingly are finding good reasons to embrace VMI. Due to this and other factors, VMI programs are experiencing a resurgence in popularity, especially among retailers and their consumer packaged goods trading partners.
In nearly a third of the VMI programs examined by AMR, the impetus for the program came from the supplier rather than the customer. Janet Suleski, co-author of the AMR report, "Vendor-Managed Inventory: Smart Investments Lead to Big Payoffs," says that in many cases these initiating suppliers were responding to successful VMI experiences with other retailers. While they may at first have been pushed into such programs, they eventually espoused VMI, viewing their participation as a competitive advantage and a way to solidify retailer relationships. "It helps create ties that bind and makes the relationship more long-term and, frankly, more difficult for the retailer to get out of," says Suleski.
Andrew Carlson, vice president of product marketing for ERP provider PeopleSoft, Pleasanton, Calif., also reports "a lot of interest in VMI among customers using our supply-chain applications." The last few times PeopleSoft has talked to supply-chain customers, he says, "this issue has been at the top of their agenda." Carlson believes that one reason for the renewed interest is the increasing consolidation in the retail sector and the growing power of "big box" retailers. "I think VMI is a proactive response to that power shift," he says. "We see a lot of customers that are suppliers to these retailers come in and, even if a program has not been mandated, they want to proactively offer VMI as a way to gain back advantage in that power game."
Jane Hoffer, CEO of Prescient Systems, West Chester, Pa., which develops supply-chain planning and execution solutions for the retail and CPG industries, says many retailers and suppliers feel that Wal-Mart is a common enemy. "The message that we see resonating with non-Wal-Mart retailers and suppliers is the opportunity they have to work more closely together to create their own sandbox, where they can differentiate themselves. So the old ROI for VMI programs, which was based on simple inventory reductions, is today superseded by a higher but less tangible benefit, which is to jointly enhance their strength against the mighty Wal-Mart."
Most of the transactions that Prescient completed in the latter part of 2003 included VMI modules, she says, "so we definitely are seeing an upsurge." Research among Prescient's customers documents this trend. Prescient queried its customer base of consumer products manufacturers and distributors as well as additional consumer products companies. It found that 75 percent of respondents are actively engaged in VMI with an average of six retail partners. In all, respondents named more than 40 retailers with whom they conduct business.
Another reason for this revival, Hoffer believes, is simply the fact that, when done properly, VMI works. "I think that after quite some time of trying different types of collaboration, companies are reverting back to the tried and true method. From as early as the mid '90s, VMI has shown that it can lead to a combination of sales increases, inventory reductions and increased turns, all at the same time," she says.
Results documented in the AMR survey bear this out. VMI programs in both the retail and manufacturing sectors were studied, but the report notes that "retailers' VMI programs had a much larger scope." The most common benefit derived was inventory reduction, which ranged from 27 percent to 100 percent, averaging around 53 percent. Companies citing lead-time improvements reported reductions ranging from 30 percent to 50 percent. Revenue expansion because of improved fill rates was marginal, but in entertainment products with highly volatile demand, revenue improved by as much as 100 percent. In the retail environment, in-stock improvements were in the range of 2 percent to 3 percent, though one company claimed a 9 percent gain.
"Almost all suppliers mentioned improved customer relationships and trust as an intangible benefit, with 30 percent of the study group claiming that the VMI program was part of a larger strategy to work more closely with their customers," the report says.
The AMR survey notes distinct differences between VMI programs in the retail sector and those between manufacturers and their suppliers. Manufacturing companies are more likely to ask suppliers for consignment arrangements, the study says. Additionally, manufacturers are less willing to give up replenishment responsibility to suppliers. They prefer to retain control over forecasting and scheduling because of the multiple component suppliers involved in making a product delivery possible. And in manufacturing, buyers seldom conferred with suppliers to derive a sales forecast, whereas in retail, buyers were more inclined to trust suppliers' capabilities in forecasting and understanding the market.
Given these differences, it is not surprising that a separate study of VMI programs in the high-tech industry concluded that suppliers in that sector do VMI only because their customers (original equipment manufacturers) demand it. "Otherwise, very few suppliers would choose to do VMI," says the report from ChainLink Research, Cambridge, Mass., and the Electronic Supply Chain Association, San Jose, Calif.
'Truth About VMI'
However, ChainLink's Bill McBeath, who authored "The Truth About VMI," warns against jumping to the conclusion that VMI is good for the customer and bad for suppliers. "It's just not that simple," he says, noting that such an assumption misses the key point: Does VMI create a net gain or loss for the supply chain as a whole? Currently, most firms lack the inter-enterprise performance measures needed to answer those questions, says McBeath. "But in our survey both customers and suppliers said that VMI has a significant positive effect on service levels and lead times."
Such improvements can help competitors in low-margin businesses stay competitive, notes Stewart Dunsmore, vice president of supply logistics for Kuehne & Nagel Logistics, which manages VMI hubs for a number of high-tech suppliers. Dunsmore cites as typical a leading contract manufacturer that hired K&N to implement a VMI program for one of its U.S. facilities. Within 14 months, he says, K&N had converted more than 85 percent of the company's inventory to VMI, increasing annual inventory turns from four to 28. This reduced material obsolescence and substantially improved return on assets. Improved visibility and streamlined processes enabled staff reductions of 20 percent in material handling and 15 percent in administration, all while improving customer responsiveness and delivering additional value-added services.
Efforts to emulate Dell Computer's very low inventory model are a key driver of VMI programs among high-tech companies. Another driver, according to Dave McLain, vice president of WorldChain, Fremont, Calif., is the anticipated turnaround in technology spending by businesses. "OEMs want to make sure that when supply is constrained and demand is growing, they will be able to get the inventory they need without impacting their operational metrics," he says. The best way to do that is to have a service agreement under which suppliers create a VMI hub very near OEM facilities, replenishing parts as needed.
Another factor driving VMI in both manufacturing and retail is industry consolidation. "One of the key things is that you have to have enough core volume for VMI to make sense," says Carl Hall, president of Enterprise Data Management, Cincinnati, an application services provider of VMI solutions. "Consolidation, which continues to be a theme in most industries we deal with, means bigger customers and bigger suppliers and bigger orders, so VMI becomes more feasible."
VMI will never be "an all things to all people kind of solution," he adds. "Generally it is targeted to the 20 percent of customers who represent 80 percent of your business."
As with all strategies, good results depend on good planning and execution. One common mistake that companies make, says Suleski, is failing to understand that VMI is truly a collaborative program. While it may not require the nine steps laid out for a formal CPFR (Collaborative Planning, Forecasting and Replenishment) process, "you do need to develop a framework of collaboration to be successful."
Paul Donnelly, marketing director for software provider Viewlocity, Atlanta, agrees that lack of collaboration was a major stumbling block to VMI as recently as two years ago, but he says conditions have "evolved significantly" since then. "We have seen a lot of improvement in the willingness and ability of companies to deal closely with outside partners," he says. "I think businesses now look at projects like VMI as a major cost-saving initiative, as opposed to just a pilot project. They are better funded and a lot more thought goes into inter-company business processes and laying the groundwork to make sure the program will work."
Viewlocity says confidence in data also has improved. "Automatic transfer of data is a requirement for VMI and with the Web and lots of application interfaces in place, companies are much better at this."
General improvement in communications, as enabled by the Web, also is cited by Lonnie Warner, vice president, high-tech group at Menlo Logistics, Redwood City, Calif. "Companies like Menlo have much more robust internet and Web-based visibility tool kits," he says. "We are much better at providing true integration with our client's ERP systems."
Another of the earlier inhibitors to VMI success was scalability, says Donnelly. "People would put programs in place that were great for one or two stores, but if you are going to scale to your entire network of stores or to more of your customer base, you have to have robust automation and be able to deal with exceptions. Two or three years ago, we did not have the exception-management culture that exists today."
K&N's Dunsmore says senior executive endorsement is one of the most critical components of success. "Without that endorsement, everyone gets distracted and the program does not get the attention it needs." Including the chief financial officer is particularly important, he says. "People who do not have a good financial understanding of how their business manages cash flow may fail to see the strategic value in these programs, so we always try to get the CFO involved."
A clear understanding between the parties of liability and responsibility also is key, says Jeff Herrmann, CEO of SupplyWorks, Bedford, Mass. "It is important to spell this out very clearly."
Appropriate technology is, of course, essential. The good news, according to AMR, is that, while sophisticated and scalable functionality is required, "many companies will find most of this functionality in their existing systems." Functional gaps, says AMR, can be filled by reconfiguring existing systems or by incremental investments in additional functionality.
"Some of the key components for VMI are the ability to understand demand, or a strong forecasting component, and the ability to create replenishment plans that are time-phased, so that you have a forward visibility to what replenishments might look like - along with being able to understand how to plan for constraints," says Ed Thompson, vice president of Business Optimization Services for Retail at i2 Technologies, Dallas. Typical constraints include cost and time for transportation, ability to handle stock volumes either in the back room of a store or in the DC, and lead times. "Taking into account constraints and weighing those constraints off against one another to give you an optimal replenishment decision is one of the things that i2's systems do very well," Thompson says.
Around 175 VMI programs are supported by products from retail specialist JDA Software, Scottsdale, Ariz. Universal Studios Home Video, for example, used JDA's E3 Vendor Managed Replenishment system to help implement a real-time VMI initiative. This program successfully replenishes all of Universal's SKUs, on a daily basis if necessary and at a store level, with multiple retail partners that collectively operate more than 6,000 stores. "Our primary function is to make our partners more profitable and we become a beneficiary," says Larry Hariton, Universal's executive vice president for operations and logistics. "It's not just about pumping out more Universal product; it's about creating incremental sales that are additive to retail."
Peter Charness, senior vice president and chief product officer at JDA, says customers already are looking at how to take VMI to the next level for greater competitive advantage. "The challenge of being able to replenish individual assortments by store is the one that a lot of players in industry are focusing on," he says. "We have a tool called Channel Clustering by Intellect that helps users cluster stores to look at the probability of selling a product based on historical patterns of sales of that and other products in other stores. A number of customers investing in this product are on the supply side.
"They are doing this as part of their sales service to the retailers to help the retailers improve their ability to sell the right product and therefore sell more product themselves."
PeopleSoft emphasizes the flexibility of its VMI capabilities. Carlson says the software supports everything from simple programs that are designed to ensure there are no shortages, all the way to environments where inventory actually is located at the customer's site but owned by the supplier, changing title only when used. "Different models can co-exist with each other," he says. "A company may have C items that are managed on consignment, as well as A and B items that are managed as a planning activity."
Carlson also notes that "all of this is fully internet-enabled so it is very easy to give the customer or the supplier full visibility into what is occurring."
Visibility also is key to solutions offered by Valdero, Palo Alto, Calif. "What companies need is to combine the EDI replenishment signal from the buyer with visibility across the extended supply and demand chain," says Walt Rossi, vice president of marketing. "In the past, there was no way to combine that signal with information about the supply picture - Can I fulfill this? In what sequence? Which order has priority? - With Valdero, you can combine these two things, which adds a lot of value."
WorldChain is developing a solution aimed at helping suppliers who find complying with VMI mandates a financial hardship. "Let's face it, these programs are a burden on a lot of suppliers," says McLain. "A major part of the cost of carrying inventory is the cost of capital and these guys may have a cost of capital of 16 percent or 17 percent - and if they turn around and mandate VMI on their suppliers, for the next tier it might go as high as 20 percent."
WorldChain has partnered with a "very large financial institution" that enables it to buy and hold goods at a much lower cost of capital, he says. "We are going to manage the inventory in our hub and we will own and take title to the goods, along with our capital partners," he says. The service, called Third-party Managed Inventory, will ensure that both parties benefit from VMI, he says.
Exel Logistics, a global 3PL provider based in the United Kingdom, also is targeting the needs of suppliers, says Vivian Butler, global product manager for VMI. The company is particularly focusing on global vendors that may be "required to be in 70 or 80 different VMI programs around the world, operated by 20 or so different 3PLs," he says. What Exel has noticed is that even large vendors that may have been able to resist participating in VMI programs, "find themselves disadvantaged in comparison with their peer group, who have gone along," he says. "We are in the process of trying to better understand the needs of these suppliers and thinking about how we can assist them."
Butler declined to say more for fear of "tipping his hand," though he did state unequivocally that the program will not involve Exel owning inventory. "We see no added value being created in our taking title," he says. "Ours is a logistics rather than an ownership solution. We believe it will be quite a strategic initiative."
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