Strategic Partnering: Types 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 Millikens textile plants to final clothing receipt at several of the department stores involved was reduced from eighteen weeks down to three weeks.

Strategic Partnering: Types of SP

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 retailers store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way.

Strategic Partnering: Types of SP

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 SP
Decrease required inventory levels Improve service levels Decrease work duplication Improve forecasts

Advantages 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 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 Inventory Management

Owner Managed Inventory

Continuous Replenishment

VMI

Consignment Selling

Direct Selling

Vendor Managed Inventory (VMI)

VMI is essentially an integrated approach whereby the inventory at the distributor/retailer (downstream) is monitored and managed by the manufacturer/vendor (upstream)

VMI rationale .
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 sustainable competitive advantage

VMI includes
Determining appropriate order quantities Managing proper product mixes Configuring appropriate safety stock

Typical Benefits to Manufacturers

Lower inventory investments (raw and finished) Better scheduling and planning Better market information Closer customer ties and preferred status

Typical 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 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 Interchange EDI

computer to computer exchange of business transaction in a standard format

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 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 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 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 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 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 SP
Criteria Decision Inventory Types Maker Ownership Quick Retailer Retailer Response Continuous Contractually Agreed Either Replenishment to Levels Party Advanced Contractually agreed Either Continuous to & Continuously Party Replenishment Improved Levels VMI Vendor Either Party New Skills Employed by vendors Forecasting Skills Forecasting & Inventory Control Forecasting & Inventory Control Retail Management

Examples of SP Successes and Failures

Western Publishing-Golden Books:
Western Publishing is using VMI for its Golden Books line of childrens 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

Examples of SP Successes and Failures

VF Corporations 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. VFs program is considered one of the most

Examples of SP Successes and Failures

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 didnt 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

Examples of SP Successes and Failures

Spartan Stores (continued)
Suppliers didnt 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 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

Examples - Caterpillar, Okuma

Incentives for dealers are they giving away competitive advantages? Skills and responsibilities are taken from some dealers/distributors.