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International Journal of Production Research

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Prerequisites to vendor-managed inventory

Tarikere T. Niranjan , Stephan M. Wagner & Stephanie M. Nguyen
a a a a

Swiss Federal Institute of Technology Zurich, Department of Management , Technology, and Economics , Scheuchzerstrasse 7 , 8092 Zurich , Switzerland Published online: 30 Jun 2011.

To cite this article: Tarikere T. Niranjan , Stephan M. Wagner & Stephanie M. Nguyen (2012) Prerequisites to vendor-managed inventory, International Journal of Production Research, 50:4, 939-951, DOI: 10.1080/00207543.2011.556153 To link to this article: http://dx.doi.org/10.1080/00207543.2011.556153

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International Journal of Production Research Vol. 50, No. 4, 15 February 2012, 939951

Prerequisites to vendor-managed inventory

Tarikere T. Niranjan*, Stephan M. Wagner and Stephanie M. Nguyen
Swiss Federal Institute of Technology Zurich, Department of Management, Technology, and Economics, Scheuchzerstrasse 7, 8092 Zurich, Switzerland (Received 31 August 2010; final version received 3 December 2010)

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Vendor-managed inventory (VMI) has become a widely used tool for supply chain performance improvement. However, not all VMI implementations are successful. Therefore, the aims of this research are to contribute to a better understanding of the critical issues surrounding VMI implementation, and to support corporate practice with a methodology for evaluating the VMI readiness of firms. Fifteen features that determine the suitability of VMI are identified. These can be broadly categorised as product-, company-, and supplierrelated features. The framework developed in this research is validated through its application in 10 case study firms. The framework can be used by other firms to support the decision of whether or not to adopt VMI by providing valuable insight into how firms score on suitability for VMI adoptions along several dimensions. Keywords: supply chain management; vendor-managed inventory (VMI); case study research

1. Introduction Supply chain co-operation has attracted increased attention among researchers in supply chain management (e.g. Langfield-Smith and Greenwood 1998, Gu llu et al. 2005, Iida and Zipkin 2010, Wadhwa et al. 2010). Pioneered by Wal-Mart and Procter & Gamble in the 1980s, and now implemented by many firms, vendor-managed inventory (VMI) is an important co-operation initiative where the supplier is authorised to manage inventories at customer locations (Waller et al. 1999, Cetinkaya and Lee 2000). Much has been written about the benefits of VMI since the 1980s. Many articles in the trade and academic literature treat VMIs superiority over traditional systems as a given. We believe, however, that the literature has largely neglected to indicate when companies could benefit from using VMI (Dong et al. 2007, Sari 2007, Bookbinder et al. 2010). VMI may not be a universally applicable solution. Likewise, the potential benefits of VMI have not always materialised. For example, Spartan Stores, a co-op grocery chain in Michigan, terminated its VMI programme because of higher delivery frequencies, inadequate forecasting capabilities by vendors, and inefficient co-ordination in promotions planning (Dong et al. 2007). Cooke (1998) has remarked that VMI could stand for very mixed impact, and lists a number of firms that have abandoned VMI. One reason for abandoning VMI is that it could impair visibility in the supply chain by transferring decision making authority to suppliers: The farther you go up the supply chain, the harder it is to see whats going on (Cooke 1998, p. 51). Data inaccuracies and poor data integrity, as well as differences in technologies and systems employed by suppliers and buyers, are other impediments to successful VMI usage. Unless a firm sees value exceeding the cost burden of VMI, it may be reluctant to make the investments required to make the process function. Clearly, VMI is not for every firm. Therefore, practitioners need a toolkit that will enable them to determine when it makes sense to adopt VMI and when it does not. This article identifies the prerequisites for VMI so that managers can evaluate their own supply chains and make better decisions about VMI. To accomplish this, the study uses insights from both academic and business literature to identify these prerequisites. Next, information on the relative importance of these prerequisites is extracted through a survey with industry and academic experts, and crafted into a VMI readiness framework. The framework is then validated by 10 case studies.

*Corresponding author. Email: ttniranjan@ethz.ch

ISSN 00207543 print/ISSN 1366588X online 2012 Taylor & Francis http://dx.doi.org/10.1080/00207543.2011.556153 http://www.tandfonline.com

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2. Literature 2.1 Vendor-managed inventory VMI is one of the most widely discussed partnering initiatives for improving multi-firm supply chain efficiency. Also known as continuous replenishment or supplier-managed inventory, it was popularised in the late 1980s by Wal-Mart and Procter & Gamble. VMI became one of the key programmes in the grocery industrys quick response. As Tyan and Wee (2003) showed from their study in the grocery industry, VMI can not only reduce costs, but also improve service levels and create business opportunities for both parties in the supply chain. VMI has been implemented by many leading companies from different industries, such as Campbell Soup, Johnson & Johnson and Barilla (Waller et al. 1999), GlaxoSmithKline (Danese 2004), Electrolux Italia (De Toni and Zamolo 2005), Nestle and Tesco (Watson 2005), Boeing and Alcoa (Micheau 2005). Under VMI, the supplier makes the main inventory replenishment decisions on behalf of the buying organisation. This means that the vendor monitors the buyers inventory levels (physically or via electronic messaging) and makes periodic re-supply decisions regarding order quantities, shipping, and timing (Waller et al. 1999, p. 183). Although the potential benefits of VMI have been praised, little consideration has been given to the question of when VMI makes sense (Dong et al. 2007). Although VMI can have many benefits, there are several impediments to its success (Fraza 1998, Holmstro m 1998, Kaipia et al. 2002). For example, great detail is required for planning, administrative costs are sometimes high and the processes of placing and filling orders can be much more ineffective. There have also been many failures on the part of the supplier to harness the customer-specific data for planning and production. In some cases, shortages have increased when finished goods have been reserved to a few priority customers. In conclusion, VMI initiatives have failed or have been cancelled (Kuk 2004). VMI is not a standard solution for all replenishment processes (Kaipia et al. 2002). In some situations, VMI offers no benefits. In general, companies that do not have the proper prerequisites for VMI fail in the implementation, and thus VMI becomes a disadvantage. It is important, therefore, to know when VMI will and will not be beneficial. Dong et al.s (2007) study makes an important contribution by investigating the factors preceding firms adoption of VMI. They used large scale survey-based exploratory research from a technology adoption perspective. Their study found that the supply chains where VMI was adopted were marked by greater competitiveness in the suppliers market, fewer operational uncertainties, and higher levels of buyersupplier multifunctional co-operation. To that extent, their study provides valuable clues on when VMI ought to make sense. However, it does not necessarily follow that the respondent firms that had or had not adopted VMI had made the right choice. By contrast, for this research, which has a prescriptive orientation, we broaden our search beyond Dong et al.s (2007) study, and seek features that are known to be conducive to VMI.

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2.2 Features impacting the suitability of VMI We are interested in features of supply chains that previous literature posits to be prerequisites of successful VMI. These features (listed in the first column in Table 1) can be classified as product-, company-, or supplier-related. Product-related features. These can be decisive in determining whether VMI makes sense. For example, Raghunathan and Yeh (2001) showed that VMI is likely to be more valuable for mature products with stable and large demand, and information sharing is likely to be more valuable for relatively new products with high demand variances (Raghunathan and Yeh 2001). Standard product identification and an integrated information system in the supply chain are also requirements for using VMI (Cooke 1998). Product volume is another feature. A popular belief is that VMI is valuable only for high-volume items that justify the additional investment required for starting VMI. Disney and Towill (2003) studied the effects of VMI on the bullwhip effect for both low- and high-volume production. The study showed that VMI does indeed have benefits on both low-volume products that typically suffer from the Burbidge effect, and high-volume products that suffer from the bullwhip effect (Disney and Towill 2003). Franke (2010) concluded that contrary to popular belief, VMI can be successfully employed in small-volume production environments, and most firms are even planning to expand their VMI programmes. This corroborates Disney and Towills (2003) finding that VMI also provides benefits to low-volume products.

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Table 1. Summary of case study survey results.

Features 0 0 1 0 0 7 4 2 2 1 2 63 2 2 3 2 0 62 132 0200 No 1 0 40 137 0200 No 3 0 2 4 0 4 2 0 69 211 201300 No 32 77 95 2 3 2 3 2 82 247 201300 Yes 2 2 4 0 2 3 1 4 71 4 1 1 2 1 65 250 201300 No 0 4 3 1 2 0 1 2 3 2 4 3 98 2 3 3 2 0 69 264 201300 Yes 2 4 3 4 2 65 65 70 114 97 116 2 3 4 3 2 94 2 3 3 3 3 92 302 301400 Yes 0 3 0 3 1 4 4 4 2 2 3 4 4 4 2 3 4 4 2 2 4 83 4 2 2 4 4 107 3 4 4 3 3 112 302 301400 Yes 2 2 1 3 3 3 2 0 0 2 3 3 3 2 2 3 4 1 4 100 3 2 3 4 2 96 4 4 4 4 4 132 328 301400 Yes

RUAG

Legacy

Louis Widmer Novartis Ferring Hilti Daimler ODLO

Merck Serono

Procter & Gamble 4 4 4 3 4 132 4 1 3 4 4 109 4 3 4 4 4 125 366 301400 Yes International Journal of Production Research

Product-related 1. Products are standardised, i.e. customisation is minimal (7.07) 2. Products are repetitive i.e. infrequent changes in product specification by customer (8.04) 3. Products have a standard product identification throughout the supply chain* (6.75) 4. Demand variance is low (4.82) 5. Demand is forecasted and stock levels are closely monitored* (7.40) Product-related score

Company-related 6. Our company revenues have been stable over the years i.e. neither grown rapidly nor fallen (3.86) 7. Transaction costs pertaining to purchasing are high (5.14) 8. Information and communication systems are good* (6.75) 9. The company has no problem sharing inventory/forecast information with the suppliers* (9.97) 10. Purchasing is a core competence of our organisation (7.07) Company-related score

Supplier-related 11. High levels of trust and long term relationships with the suppliers exist* (7.72) 12. VMI benefits are evident to both our company and our suppliers (7.07) 13. Key suppliers constitute a high percentage of purchase orders* (5.14) 14. Suppliers are willing to cooperate with a VMI initiative (8.68) 15. The companys information system is integrated with the suppliers* (4.50) Supplier-related score

VMI readiness score Score range Decided to use VMI?

941

Notes: Academic and industry experts rated the features on a scale ranging from 0 (not important at all) to 4 (highly important). Case study respondents rated the items ranging from 0 (not applicable at all) to 4 (highly applicable). Items marked with an asterisk (*) are controllable/improvable features, the others are not. The asterisks are provided here for ease of presentation and did not appear in the original surveys. Figures in parentheses next to items are the item weights expressed in percentage. They did not appear in the original surveys.

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Another misconception is that VMI can only be used for low-value parts because critical/high value items need to be handled in-house for greater control. Franke (2010) showed how several firms in his study have been practising VMI even for high-value parts for more than 10 years and continue to extend their schemes to include more items and suppliers, thus proving that low value (high volume) of parts is not a prerequisite for successful VMI. Company-related features. These can also affect the feasibility of VMI. For example, a company can see purchasing as its core competency. Such a company would naturally be reluctant to adopt VMI and may insist on retaining the traditional purchase orders. One can expect VMI to fail in such companies even if it were implemented due to external pressure. Yao et al.s (2007) analytical model provides a better understanding of how ordering costs and carrying charges (important supply chain parameters) affect the inventory cost savings to be realised from VMI, and the distribution of these savings between buyers and suppliers. They also mention some other requirements of VMI, such as the need to share information and to have co-ordinated and integrated processes between buyers and suppliers. The authors demonstrate that benefits may be generated from VMI as long as the ratio of the order costs of the supplier to the buyer and the ratio of the carrying charges of the supplier to the buyer are favourable (Yao et al. 2007, p. 671). Supplier-related features. Claassen et al.s (2008) study of the enablers of successful VMI implementation concluded that the quality of the relationship and information sharing are important factors in the success of VMI. Lack of trust between the trading partners resulting in the reluctance to share information is also a reason for unsuccessful VMI (Fraza 1998). Trust can only be developed when firms are able to demonstrate to the trading partners the benefits of shifting to VMI (Kaipia et al. 2002). Using long-term relationships as a selection criterion to choose their VMI suppliers results in fewer conflicts over inventory ownership, payments and trust issues and thereby increases the success of VMI (Franke 2010). The purpose of VMI should be to integrate key customers in the supply chain. VMI is appropriate in a company if key customers constitute a high percentage of the vendors sales figures, if the products are standardised and requested repeatedly, if product growth is not excessive, meaning that the requirement patterns are stable and it can be assumed that requirements will not occur spontaneously and finally if the transaction costs for order processing and production planning are high (SAP 2010).

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3. Methodology This research includes a literature review to identify features that affect the suitability of VMI, discussions with both academic and industry experts on these features, and case study analysis of how these features may play a role in actual business situations (Figure 1). In the first stage, academic and industry experts rated the importance of each of the 15 features identified from literature (see Section 2.2). We chose five academic experts and five industry experts. Each academic expert held a doctorate in supply chain management and among them had published over 100 research papers in reputable journals and practitioner outlets in this field. Each industry expert held a senior position in supply chain functions,

Stage 1

Features 15 survey items extracted from literature

Importance 15 survey item weights elicited from experts

Case studies Stage 2 VMI readiness score VMI readiness score = 15 Item i* Item weight i
i=1

15 item scores elicited from company respondents

Figure 1. Research design.

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and had deep knowledge of supply chain management. Both categories of experts were selected through personal contacts. They were asked to rate the importance of each of the 15 features on a 5-point rating scale anchored at not important at all (0) and highly important (4). There was a high degree of agreement in the experts responses (Wagner et al. 2010). The importance rating resulted in a weight of each feature expressed as a percentage (listed in the first column in Table 1). It was deemed useful to classify the 15 features based on whether they were amenable for improvement through managerial effort, or whether these features could not be manipulated easily. This distinction is important because there could be cases where VMI would not be used due to some factor being unfavourable, giving the impression that the company was justified in not using VMI, whereas in reality the company could easily have rectified that feature, and VMI would actually be a missed opportunity. In the second stage, a case study methodology was used to enrich and validate this framework. Case study research is suitable for developing firm-level understanding of a phenomenon (Eisenhardt 1989, Meredith 1998), in this research, contextual factors underlying firms decision to use/not use VMI. A clear sequential process was not followed in this research, rather, considerable iterations between the theory and development of successive case studies preceded finalisation of the proposed framework. In other words, the framework is indeed the outcome of both the literature review and the case studies. The survey was finalised and administered after all 10 qualitative case interviews had been completed. Ten companies in Switzerland (or nearby countries, i.e. Germany and the Principality of Liechtenstein) were chosen based on convenience and accessibility. The companies were from different industries and there was a mix of companies that did and did not use VMI. The interviews provide a context-rich description of why the companies decided to use or not use VMI. The interviewees were supply chain managers, material logistics managers, or purchasing managers. The interviews typically lasted one hour. Eight were conducted at the company site and two were done over phone due to large geographical distance. Next, 2 to 6 weeks after finalising the case studies (depending on when the case study was conducted) the quantitative questionnaire based on the framework was administered to respondents from the case study companies (who were different from the interviewees in the preceding case study research). The questionnaire consisted of the 15 features (whose weights were determined independently by the academic and industry experts) and the respondents were asked to rate their applicability to their supply chain on a 5-point rating scale anchored at not applicable at all (0) and highly applicable (4). The weighted sum of the 15 features yields the VMI readiness score for each company (Table 1). The possible range of scores is between 0 and 400 (i.e. a company rating the applicability of the items to their firm as 4 for each of the items results in a score of 4 100 400, and a firm rating 0 for each of the items results in a final score of 0. If a company scores below 50%, then the framework indicates that the company does not meet the prerequisites for a successful VMI. If the score falls between 50% and 75%, the framework indicates that VMI should be a serious consideration for that company. This means that although they do not fulfil all the requirements, a bit of effort could still make VMI a success, especially if there are many features which, as indicated in the framework, fall into the category of improvable factors and are cost effective. It is more likely that improvement should be focussed on features scoring low rather than those already scoring reasonably high. If the company scores above 75%, VMI is considered to be appropriate.

4. Case studies 4.1 RUAG RUAG is an international technology group focusing on space travel, aviation, security and defence technology for both civilian and military application. RUAG is an established company with stable growth. Since work is done on a project basis, production is based on changing customer demand, meaning their products are customised and therefore constantly changing. Products ordered from their suppliers are rarely standardised and have high demand variances. Exact quantities are ordered for each project, and are first printed, and then sent by fax, email or post to their suppliers. Most parts take 3 to 5 weeks to arrive, while some high-value items take 12 to 24 months. Lead times for commodities are usually 3 to 5 days. At the end of a project, left-over parts are either saved, if they can be used in another project, or they are scrapped.

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RUAG also orders office supplies such as paper. Since paper is used in large quantities, the SAP system manages the stock and places orders automatically when the level falls below a set replenishment level. The paper then arrives 1 or 2 days later. The same method is adopted for screw thread inserts, which are also used in large amounts. RUAG has chosen not to use VMI for its production site in Switzerland, citing several reasons. First of all, since RUAG works on a variety of projects for the customers, these projects are one-time only and the required parts change for each project. Since smaller quantities of parts are ordered, VMI is not considered to be worthwhile. For example, RUAG could consider using VMI to replenish its stock of paper or screw thread inserts, but since the system places orders automatically, the transaction costs are low and there is little real value in changing the process. Another reason is the documentation requirements. Since every part that comes in needs to be inspected and documented, RUAG chose to place its own orders and control inventory more directly. With a score of 7 (product), 63 (company), and 62 (supplier), RUAG aerospace has a total weighted VMI readiness score of 132. Since this company scores below 50%, the framework does not recommend the use of VMI; this is consistent with RUAGs decision.

4.2 Legacy Pharmaceuticals International Legacy Pharmaceuticals International is a global manufacturer and seller of prescription, OTC, generic and cosmetic products. Its core business is its contract manufacturing undertaken in Basel, Switzerland, and in Puerto Rico. Most of its customers are other pharmaceutical companies, mainly in China. Raw material is sourced from around the world, mostly from Europe and the US; China or other low-cost countries are a consideration for the future. Legacy manages its inventory through a very crude IBM AS/400 system. The system, still displayed on a black screen with green writing, holds basic inventory data and controls the stock movement. The system shows where inventory is and then allocates goods to an order. In addition, it allows representation of different steps of the process, but not process planning. Inventory data is extracted from AS/400 into an Excel spreadsheet. Inventory is then checked on a weekly basis to update the forecast. On the customer side, forecasts are 1.5 to 2 years in advance, but on the supplier side forecasts are rolling on a yearly basis, similar to the ordering launching system commonly seen in automotive supply chains (Niranjan et al. 2011). This means that they prepare forecasts for one year in advance and update them every month. The first three months of forecasts are the firm orders for the suppliers, whereas the remaining months stay as a forecast. This long forecast allows the key suppliers to block inventory. In order to improve its inventory management, Legacy has decided to implement an ERP system to replace the AS/400. The company is looking for an appropriate system, since systems like SAP are too large and complex. Legacy has chosen not to implement VMI. The company places only 80 orders a month, so VMI would not be of much value. In addition, some of its products are publicly available and it is not possible to order in advance or reserve quantities; they must be bought quickly before competing customers do. This is not possible with VMI. For example, Legacy buys calf blood from Australia. Since calf blood is very limited in supply, Legacy buys as much as possible when it is available in order to avoid shortages. Another reason is to retain control of its operations. According to the interviewee, in the pharmaceutical industry it is possible to make a lot of money very fast, keeping the control of operations is very important. VMI can deprive the company of some of this control. Regulations are also a reason why Legacy is reluctant to implement VMI. Like other pharmaceuticals companies, Legacy must follow strict regulations. For example, there are strict regulations concerning shelf life. It is easier for the company to comply with regulations if it places its own orders, rather than letting suppliers manage the inventory through VMI. Finally, Legacy believes that when some products are ordered from different suppliers, it is less expensive and more efficient to place their own orders. A system might not be able to manage the frequently changing suppliers for specific products. In general, Legacy believes that VMI will only work for high volume product with fast turnover, such as for fast moving products. VMI is potentially attractive for only a handful of suppliers, but the company claims to manage inventory very well the way as it is done at the present time. Legacy has a VMI readiness score of 137, which is below 50%, and the framework recommends not using VMI; this is consistent with Legacys decision.

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4.3 Louis Widmer Louis Widmer is a cosmetics company with headquarters in Schlieren, Switzerland. Louis Widmer orders raw materials from suppliers through order requests. These requests are usually printed and faxed to the suppliers with the product type, quantity and delivery deadline. If the deadline cannot be met, the suppliers send a message to that effect. Once the raw material arrives at Louis Widmer, the products are manufactured and packaged on site and then distributed to its customers. These customers include subsidiaries around Europe, as well as pharmacies in Switzerland. The lead time to acquire products from its suppliers is relatively long. It usually takes 6 to 8 weeks for deliveries to arrive, but lead times of 14 to 16 weeks are not uncommon. Such long times require either efficient planning or a large inventory. The inventory at Louis Widmer is managed through a process industry ERP system called Infor ERP Blending. Each department is responsible for planning and purchasing its own products. Talented employees are responsible for planning and optimising their inventory levels, and for ensuring that their products are available on time. In this manual scheduling system, the purchaser receives order requests from production and is in charge of prioritising its products. In addition, the customers order products 2 to 3 months in advance with no year-long plan and keep the inventory in their own factories. The purchaser needs to forecast the customer requirements based on past data and sales promotions. The purchasers knowledge is based on information about and experience with changes in product, trends, and promotions. Louis Widmer has three reasons for not implementing VMI. The first reason is that there is a great amount of specialised knowledge required in the purchase of materials from the companys suppliers. The employees have special expertise about the products, demand and production planning which the company believes cannot be programmed into a system. For example, the production department makes constant changes, often at the last minute, so it is difficult to plan. According to the company, human effort is the best option. In addition the company is afraid of the suppliers ability to adapt to frequently changing orders. Another reason is the balance of power between Louis Widmer and the suppliers. The company believes that VMI, which allows suppliers to make decisions on inventory replenishment is not in the best interest of Louis Widmer. The final reason for resisting VMI is to preserve jobs for company employees. With a score of 65 (product), 77 (company), and 69 (supplier), Louis Widmer has a VMI readiness score of 211. Therefore, this company scores in the 50% to 75% range and the framework indicates that VMI should be a serious consideration. That means that although the company does not fill all the requirements, a bit of effort should make VMI a success, especially if two low-scoring features which fall in the improvable category are improved: sharing inventory/forecast information with their suppliers and having an integrated information system with its suppliers. Although the framework recommends careful consideration of VMI, Louis Widmer has decided not to use it. In either case, Louis Widmers decision matches the frameworks recommendation.

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4.4 Novartis Based in Basel, Switzerland, Novartis offers a diversified portfolio of innovative medicines, cost-saving generic pharmaceuticals, vaccines, diagnostic tools and consumer health products. Novartis is among the leaders in supply chain management practice (OMarah 2007). The company matched global supply and demand with highly responsive product launch to lower inventories and improve forecast accuracy. Novartis also employs a governance model that has driven compliance standards globally (across manufacturing sites), based on the proven methodologies of the Toyota Production System. Vice President for Materials Management at Novartis, Jim Edwards, once described Novartiss supply chain thinking as Inventory is evil. Speed is cool. Integration is supercool (Miller 2004). With a supply chain spanning more than 12 countries, Novartis has been integrating its production plants, warehouses, distribution centres, and contract manufacturers into a supply network. A part of this effort included the implementation of SAP, the leading ERP solution for large enterprises. The goal was to use SAP to reduce total cost of ownership by streamlining industry-specific processes and replacing existing systems. The large quantity of products manufactured at Novartis is a challenge in itself. With the help of SAP, Novartis has managed its growth and kept its extensive supply chain intact. When Novartis was trying to implement VMI functionality, a collaborative platform was developed in SAP. Important suppliers were integrated into the VMI module to manage demand and deliveries. Historical data remained in SAP, as well as the bills of materials and inventory levels.

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The screen available to the supplier is simple. It has the orders and the deliveries moving based on the speed of production. The updates for all the replenishment orders are done once a day. The inventory is then automatically adjusted and sent to the Master Requirement Planning (MRP) system, and from there to the front page of the suppliers. Novartis implemented VMI to manage the growth of the company without needing more resources. The company wanted to focus on more value-added processes, such as process exceptions which require human knowledge. In addition, its strong and mature ties with its suppliers were a strong incentive to use VMI. The longer the co-operation, the better it was to implement VMI with them. It gave its suppliers the freedom to produce in the most optimal way. The main benefits of using VMI at Novartis were the synchronisation of processes and the improved ability to supply on time. The process ran smoothly and inventory levels were greatly reduced. With a score of 70 (product), 95 (company), and 82 (supplier), Novartis has a VMI readiness score of 247. Therefore, this company scores between 51% and 75% and the framework indicates that VMI should be a serious consideration. Since Novartis decided to use VMI, its decision is consistent with the frameworks recommendation. It appears that although its supply chain is not ideal for VMI, the company considered this option carefully and implemented VMI successfully.

4.5 Ferring Pharmaceuticals Ferring Pharmaceuticals is a research-driven biopharmaceutical company devoted to identifying, developing and marketing innovative products in the fields of reproductive health, urology, gastroenterology, endocrinology and osteoarthritis. Ferrings quantity of purchased products in Switzerland was described by the Director of Supply Chain Management as insignificant compared to that of other medium/large pharmaceutical companies. Its product quantity and inventory levels are not significant enough to make its purchasing process with its suppliers a challenge to them. Therefore, Ferring manages the flow of goods with its suppliers using very standard purchase orders, but the company manages its internal supply among Ferring entities, with a VMI concept integrated with its Oracle ERP system. Ferring has decided not to use VMI for an external supplier. The main reason is the complexity of the system when requiring proper validation. Using VMI with hundreds of suppliers seems to pose a risk for the validation and the qualification of the system unless it is protected with a firewall. For example, the secondary packaging of a drug usually contains critical information about how to use the drug. If, for any reason, the information is changed without authorisation, the company might be liable in case health issues arise. The second reason is that the company has not yet found it worthwhile to set up VMI when purchasing levels are low. In addition, VMI is thought to be most useful for low-value items such as shipper boxes and labels, not for high-value products. With growth expected in the future, VMI might make more sense for them, but at the moment, Ferring does not see a need for it. Another reason is the long lead times of its products. Compared with automotive or aerospace products, pharmaceutical products do not take up much space and there is less of a need to limit inventory. In particular, the shelf life of its products is sufficiently long that there is no worry about maintaining a higher level of inventory. Finally, Ferring has not implemented VMI with its suppliers because its employees fear power shifting from them to suppliers. With a score of 114 (product), 71 (company), and 65 (supplier), Ferring has a VMI readiness score of 250. Therefore, this company falls in the 51% to 75% range, so VMI should be a serious consideration. With good information and communication systems, sharing of inventory/forecast information with its suppliers, key suppliers constituting a high percentage of its purchase orders, and an integrated information system with its supplier (these all are features in the improvable category), VMI could be appropriate. The framework recommends careful consideration of VMI. Ferring has decided not to use it, but will consider it in the future when some of the features are improved.

4.6 Hilti With its group headquarters in the Principality of Liechtenstein, Hilti provides leading-edge technology to the global construction industry. Hiltis unique structure is based on a worldwide supply chain that encompasses every step,

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from purchasing the raw materials through delivery of the finished product to the customer. The company is guided by its motto order today, we deliver tomorrow and focuses on operational excellence and lean methods of manufacturing. To assist its operations, Hilti takes advantages of an automated warehouse system, the ERP system SAP R3 and VMI. For Hilti, VMI was not a difficult choice since the Manager of Materials had a positive experience implementing VMI in another company. The final decision was made after determining the need to reduce administrative costs, improve supplier relationships, and optimise its supply chain. With a score of 97 (product), 98 (company), and 69 (supplier), Hilti has a final VMI readiness score of 264. Therefore, this company falls into the 51% to 75% range and the framework indicates that VMI should be a serious consideration for Hilti. Since Hilti has decided to use VMI, its decision matches the frameworks recommendation.

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4.7 Daimler Daimler is a German manufacturer of premium segment automobiles, vans, buses, and trucks. Its automotive branch Mercedes decided to use VMI to reduce administrative efforts (e.g. calls and shortage management), improve delivery reliability, reduce stock levels, have a warehouse paid by the supplier, have completely integrated processes which are transparent and stable, and finally to optimise the transportation system. The decision to implement VMI was also to improve supplier relationships, increase supplier transparency of demand and optimise production with both optimal lot sizes and a balanced way to deal with orders. Finally, they wanted to reduce their time spent on administrative and troubleshooting efforts. With a score of 116 (product), 94 (company), and 92 (supplier), Mercedes has a VMI readiness score of 302. Therefore, this company scores over 75% and the framework indicates that VMI is recommended. Since Daimler decided to use VMI, its decision matches the frameworks recommendation.

4.8 ODLO International ODLO International is a Swiss functional sportswear manufacturer. With subsidiaries throughout Europe, ODLO sells its products in 20 countries. Upstream of ODLOs supply chain are suppliers of fabrics, accessories, and other raw materials. The production is either done in its own factories or by suppliers, with 90% of the underwear and TEC-shirts produced in its own factories in Portugal and Romania. With an international distribution centre, the finished goods are shipped to its subsidiaries around Europe. Finally, the goods go through the dealer, which acts as a warehouse, and are placed in shops available to the final customers. In order to keep track of demand by the final customers, ODLO tracks point of sale (POS) data at the shops. The products belong to ODLO until the point of sale, when the invoice is made. There are about 3000 POS worldwide. In addition, ODLO has 900 shop-in-shop systems. This is where ODLO owns a space in a larger shop, such as Jelmoli, in which it sells its products. Since this shop belongs to ODLO, ODLO is responsible for the shelf replenishment of the items. Supply chain management efficiency at ODLO can be measured through the delivery service of stock items, the cost per saving minute at its own production, the cost per piece for central distribution, and finally the lead times for inbound and outbound logistics. ODLO uses VMI with both its customers and its suppliers. With a textile-oriented ERP system called INTEX, ODLO manages the inventory at the retailer. It then manages the availability of goods at the stores through sales reports transmitted by electronic data interchange (EDI). These sales reports contain POS data which ODLO also uses to plan its own production. ODLO has decided to use VMI with some of its customers. According to the Director of Supply Chain Management, there were three reasons for the decision. The main reason was to optimise the customer relationship. If ODLO was more bound to its customers, they would be forced to rely more on each other. Having a good relationship means more and better work together in the future. The second reason was to increase the availability of the products on the shelves by managing production with POS information. The higher the availability, the more sales the company could make. High availability also prevents the loss of sales to competitors with better stock availability. The third reason for using VMI is simply because the customers wanted it. Although it provides benefits to both parties, some of its customers requested it and ODLO believed that it had no choice. One of the problems with VMI at ODLO is that it is not strategically set up well. Although sales figures of most of its customers shops are available, information sharing is not yet optimal. As the Director of Supply Chain

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Management repeatedly noted, VMI is all about information management. Its about getting sales data, making stock data interpretations, and making the right conclusion about strategy. He emphasised that VMI is only a tool, and a tool is not worth much without intelligent management and people who can interpret the data. An example of such information management problems has to do with the master data. For instance, each product has an EAN code (barcode) and the customers have their own numbering system which is different from the other parties in the supply chain. Either a converter company in between the two parties is in charge of aligning products, or the ERP converts product IDs automatically. This makes it difficult to keep track of products. Another problem of information management has to do with changes in product IDs. Apparently, there is one employee at ODLO who does nothing but data correction. It takes a lot of work to make changes and adjustments to article numbers for correction. In addition, price changes are still done manually. As a result of poor information management, inventories throughout the supply chain often do not match with what the system claims is available. For example, this could happen when a sales person forgets to register sold items. Such mistakes with inventory generate substantial losses for ODLO. With a score of 83 (product), 107 (company), and 112 (supplier), ODLO has a VMI readiness score of 302. Therefore, this company scores over 75% and the framework recommends VMI; this is consistent with the companys actual practice.

4.9 Merck Serono With headquarters in Geneva, Switzerland, Merck Serono is the division for innovative small molecules and biopharmaceuticals of the Merck group. Since Merck acquired Serono, the manufacturing sites are divided between biotech and pharma. Merck Serono manages the distribution of products from the manufacturing sites to its affiliates. On the biotech side, there are two main manufacturing sites in Switzerland and Italy. They are responsible for both packaging and semi-finished production. On the pharma side, there are four manufacturing sites in Germany, France, Spain, and Austria (in addition to local sites for which the supply chains are not managed on a group level). Finished products are then pushed directly to their affiliates. Merck Serono has 44 distributions centres in more than 100 countries. Merck Serono uses a VMI concept to minimise the inventory levels throughout the group. The inventory is managed by a system from Manugisitics, which was recently bought by JDA, a supply chain company. Although it is not called a VMI system, the concept is similar. Merck Seono used four modules to manage demand, collaboration, fulfilment, and master planning. The first two (demand planning and collaboration) are linked to the demand side. They perform statistical forecasts based on sales, taking into account both trend and seasonality. The third module is to manage the fulfilment and works as a distribution requirement planning (DRP) module. The fourth module (master planning) is responsible for the production planning for the manufacturing sites on the biotech side. After the implementation of the fulfilment module, it took six months to reduce inventory levels by 20%. Once demand planning had been implemented, the accuracy of forecasts began to improve: 20% in only one year. Customer service also improved. The company is now at 99.8% service level (ability to deliver to customers), although it is helped by having a buffer stock at the affiliates. Inventory management using VMI is done in close collaboration with its affiliates. Although they are part of the Merck Serono group, the affiliates are independent entities. They are responsible for sharing their local sales data so that Merck Serono can move finished items to them. They calculate delivery requirements based on the main stock levels every month, considering safety stock and frequency of delivery. Usually, they try to keep no stock in the manufacturing sites and only produce what has to be shipped. The objective is to have minimum stock worldwide. Only when orders need to be grouped together would a shipment be held in the warehouse. Only a few local affiliates manage their own inventory and place orders in a traditional manner. With a score of 100 (product), 96 (company), and 132 (supplier), Merck Serono has a VMI readiness score of 328. Therefore, this company scores over 75% and the framework indicates that VMI is recommended for that company, consistent with Merck Seronos decision.

4.10 Procter & Gamble Procter & Gamble (P&G) is a global consumer goods company that is well known for its supply chain practices, and uses VMI as part of its efficient consumer response (ECR) strategy. The objective of VMI was a strategic business

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partnership between P&G and its customers. Its decision to implement VMI was made to optimise logistics along the supply chains to its customers. As the supplier, it has to focus on its own products and organise and optimise the product flow in a more efficient way. In addition, P&G attempted to improve its overview of their supply situation and product availabilities, which the customer does not have. In the past the company often had better planning tools than the trade partners could provide. P&Gs Swiss division uses VMI only with its main customers. For some customers, it is a requirement for doing business. With a score of 132 (product), 109 (company), and 125 (supplier), P&G has a VMI readiness score of 366 above the 75% threshold. The framework indicates that VMI is recommended for that company. Since P&G uses VMI, its decision matches the frameworks recommendation.

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5. Summary and conclusion This study identified a need for a framework to guide companies in their decision to use VMI. It then proposed a framework for testing the VMI readiness of firms, based on 15 prerequisites drawn from the literature. The framework was illustrated and validated through 10 case studies. Each case study provides a thick description of the context and managements rationale for using or not using VMI. The results are then independently verified in a less rich, but more objective manner through a questionnaire. The numerical results are reflected in the VMI readiness score, which is the weighted sum of each of the 15 features. The 10 cases investigated in this study largely validate the framework. As predicted by the framework, companies that decided not to use VMI had scores below 50%. These firms include RUAG and Legacy Pharmaceuticals. All of the companies that decided to use VMI had scores exceeding 300: Daimler, ODLO, Merck Serono and P&G. The remaining companies fall between the 50% and 75% score range and include a mix of companies using VMI and those not using VMI. To be more precise, Louis Widmer and Ferring Pharmaceuticals have decided not to use VMI, while Novartis and Hilti have decided to use VMI. For the practitioner, this article presents an easy-to-use methodology to evaluate firms VMI readiness, which can provide insight and aid the decision making on whether to use VMI. The methodology involves the completion of a 15-item questionnaire, where respondents rate from 0 to 4 the applicability of the features to their supply chains. The final score is simply the weighted sum of the 15 item scores with the weights expressed in percentage. The range of possible overall score is [0, 400]. A score below 200 suggests a No Go, a score of 200300 suggests a Consider VMI and a score of over 300 suggests a Go for VMI implementation. Further insight can be offered on the Consider VMI category by observing whether the features scoring low fall into the controllable or uncontrollable class. If most of the features are uncontrollable, there is not much the company can do to change the conditions that would make VMI viable. Although the framework offers many useful insights, some limitations of the methodology may be noted. First, the weights were chosen by experts. Weighting the survey was intended to be a step forward from the mainstream research approaches. The latter approach often involves simply administering a survey and assuming that all features carry equal weight. However, our improvement of assigning weights, while indeed an improvement, is not foolproof because of our assumption that the weights apply equally (as opposed to similarly) to all firms; this need not be the case, and it is indeed possible that some industries/firms may need a different set of weights from others. Would the results be altered significantly if the weights assigned were different, or in other words, would the results be reproducible if a different set of experts had been used? We checked this possibility by deriving the results after completely dropping the weights (i.e. sum of raw scores). The results remained unchanged; the relative final scores were almost identical to the previous ones. Therefore the framework is robust. There is still the opportunity to refine the weights to suit individual industries or types of firms, or other possible classifications, which we leave for future research. We would also add that the threshold scores were decided somewhat arbitrarily, and to be round figures (for example, setting the cut-off point at 200 instead of, say, 203). A more rigorous, large scale study can refine this method and derive exact values of the threshold, thus improving the predictive power of the tool. Further, although we claimed to validate the framework by 10 cases, the case studies were more in the spirit of enriching the framework, rather than validation in the strict sense. An area for future exploration is to test/refine the tool with a large scale survey. Further, the empirical validation of this study is limited to showing that companies exhibiting features that the literature claims will lead to successful VMI do indeed use VMI. This research did not explicitly investigate whether their VMI was indeed successful, and whether it led to significant improvement in firm performance. However, the qualitative responses suggest that the managers believe it does: none of the managers

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regretted their decision to implement or not implement VMI, thus supporting the framework. Rigorous validation through suitable extensions to the survey is indeed another area that needs to be addressed in future research.

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