Implementation of Continuous Replenishment and Vendor

Managed Inventory

Focus on efficient replenishment of products Part of Efficient Consumer Response (ECR) arena Improving the flow of products in the supply chain

GOALS: Increase inventory turns Reduce inventory levels Decrease stock-outs Improve customer service levels Boost warehouse efficiency Enhance trading partners' perception of value

Continuous Replenishment Programme (CRP)

Vendor Managed Inventory (VMI)

OBJECTIVES:Increase in-stock inventoryIncrease salesImprove customer serviceIncrease gross marginsReduce overall inventory in the supply chainStabilize vendor's production

Manufacturer decides when to replenish Usage of automatic electronic messages VMI implementation in industries like, department stores, apparel, automotive and paper manufacturing

Vendor Managed Inventory (VMI) model

From the supplier's perspective, a VMI model generally entails:1. Receiving stock levels from a customer2. Receiving sales forecasts from a customer3. Generating replenishment orders when needed4. Sending dispatch advice to a customer5. Receiving sales reports from a customer6. Sending invoices to a customer.

Fig. A two stage VMI supply chain

Information Flow

Inventory levels – From distributor to manufacturer The current stock quantity The quantity in order The quantity reserved for some customer orders The backorder quantity (stock out)

Sales history – From distributor to manufacturer The quantity sold over the last period The number of sold lines Forecasts can also be provided by the distributor

Order proposal – From manufacturer to distributor The Ship To location The order quantity

Manufacturer

Distributor

Final Customer

sFinal

Custome

r need

Inventory Level Sales history

Order Proposal

Purchase Order

Order Acknowledgement

Delivery

Benefits

Supplier benefits: Visibility to the customer's point-of-sale data simplifies forecasting. Promotions can be more easily incorporated into the inventory plan. Customer ordering errors are reduced. Stock level visibility helps identify priorities (replenish stock versus a stockout). The supplier can see the potential need for an item before the item is ordered.Customer benefits: Fill rates from the supplier, and to the end consumer, improve. Stockouts and inventory levels often decrease. Planning and ordering costs decrease since the responsibility is on supplier. Overall service level is improved by having the right product at the right time. The supplier is more focused than ever on providing superior service.

Dual benefits: Data entry errors are reduced due to computer-to-computer communications. Overall processing speed is improved. Both parties strive to offer better service to the end consumer. A true collaborative partnership is formed between the supplier and the customer

A leaf from VMI Implementations

Schneider Electric Case StudyVMI implementation for a Global Energy Management Specialist

Schneider Electric Business

•Help our customers to achieve more while using less of our common planet

Mission•Safe•Reliable•Efficient•Productive

Goals

•Power and Control

•Energy Management

Business

Drivers for VMI Implementation

•Common goal to improve services to end-customer•Partnership leading to strong and long-term ties between distributor and manufacturer

Dual Benefits

•Decrease in stock-outs and inventory levels•Reduction in planning and ordering cost

Distributor Benefits

•Visibility of the Distributor’s Sales data makes forecasting easier•Promotions can be more easily incorporated into the inventory plan. •A reduction in Distributor ordering errors

Manufacturers Benefits

Information flow between Manufacturer and Distributor

Inventory levels

Daily

Current stock quantity

Quantity in order

Quantity reserved

Backorder quantity

Sales history

Monthly

Quantity sold over the last period

Number of sold lines

Forecasts from Distributor

Order proposal

Daily or set days of a

week

References and the Quantities for ordering• The Ship-to-

location• The order quantity

Impact of VMI at Schneider

The savings identified at the beginning of the project were met

With a comparable level of product availability the stock coverage strongly reduced

Right products were put on the shelves of the distributor leading to better product turn-over

Clear workload reduction was visible

Due to improvement in forecasting it was then acceptable to update the stock parameters every two months instead of every month.

The reduction of training needs was also very clear

Volvo Powertrain

VMI implementation for a Global Energy Management Specialist

Company Profile

World’s largest manufacturer of heavy-duty diesel engines

Supplies the entire Volvo group with driveline components

Employees approximately 8000 people

Operations in Sweden, France, Brazil and US

Production is Customer based

Identified VMI is an efficient tool to lower inventory level and improve relationship with its suppliers

Impact of VMI

Pipechain VMI software was employed

Cover days of stock lowered from seven days to three days

Inventory reduction of 67 percentage

Reduced administration costs

High supplier satisfaction

Decrease in set-up time

Procordia Food

VMI implementation for a Global Energy Management Specialist

Company Profile

Part of Orkla Group

Nordic region’s leading supplier of manufactured food products for grocery trade

Annual turnover over 3 billion SEK

1500 Employees

Headquartered at Eslov, Sweden

Impact of VMI

Service levels have gone up from 94% to 98%

Inventory Level has been decreased by 30%

Order processing cost has declined by 40% throughout supply chain

More efficient production planning

Easier for co-planning and optimizing set-up times

VMI in Apparel ManufacturingWith cases from the Indian market

VMI applications in apparel manufacturing

A step beyond just-in-time (JIT) in the manufacturing scenario

Consumables procurement practicing VMI between the needle supplier and apparel

manufacturer will result in negligible cost and space savings for the manufacturer

Accurate prediction by the vendor of merchandise quality and quantity

A sewing thread supplier can decide on the type of thread and calculate fairly accurately the quantity required based on the fabric swatch and apparel sample

VMI case studies in Indian apparel manufacturing

Case 1: Apparel Manufacturer in Bangalore

• Controlling sewing thread inventoriesChallenge

• The manufacturer alone would calculate and order the total quantity of thread, with any surplus or shortage being the manufacturer's problem

Pre VMI Process

• The onus of any surplus or shortage was shifted totally to the thread supplier

• The demand pattern (based on the production schedule) was shared with the thread supplier

Strategy• Barring some standard colour like white

or black, thread is a perishable item so the thread supplier withdrew from the arrangement

• Under the new risk sharing arrangement the cost of dispute/surplus quantity of thread is being shared by both the thread supplier and apparel manufacturer

Result

Case 2: Apparel manufacturer in NCR

The manufacturer blocks certain quantities of thread with the thread supplier,

who then maintains the thread inventory and delivers products just-in-time when required by the manufacturer

Blocking thread quantities is only valid for a certain period of time, after which the thread supplier is free to sell the thread to other manufacturers

Geographical proximity between both companies

The thread supplier avoids complicated reverse entry of goods if there is a surplus The manufacturer avoids being left with surplus stock, while guaranteeing against out of stock The responsibility for calculating the correct quantity still remains with the manufacturer

Trends –VMI in apparel

Products like zippers and needles were also explored but manufacturers felt these were too insignificant to experiment with

While exploring similar arrangements with sewing machine spare parts suppliers in India it was found that similar practices are being exercised with a few large apparel manufacturers for selected high priced machines.

Sustainability Absence of large apparel manufacturers, the driver of VMI

implementation There is an absence of major machine manufacturers According to Professor Sunil Chopra, VMI should only be

implemented in cases where the manufacturer/vendor can forecast demand more accurately than the distributor/retailer

VMI presupposes EDI between the trading partners, since an absence of the EDI infrastructure will make the "time gain" factor difficult to appreciate (and convert to a cost advantage) by partners

The emphasis is on the relationship, and the software merely automates the demand analysis. The sales tax and other procedural complexities may need to be simplified if there is to be a smooth flow of material and information between partners

International VMI Implementation

Some examples of companies which chose to implement VMI

Other successful VMI Impleementations

K-Mart•Customer service measures have gone from the high 80s to the high 90s•Inventory turns on seasonal items have gone from 3 to between 10 and 11, and for non-seasonal items from 12-15 to 17-20

Fred Mayer

•Reduced inventories 30-40 per cent•Service levels increased to 98 per cent•VMI 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•Turnover doubled•Wal-Mart's operating costs fell•P&G's market share grew (because Wal-Mart gave it preferred shelf space)

Success KPIs, Challenges and Pitfalls of VMI How to measure success of a VMI implementation

What are the major challenges in implementing the VMI

What are the possible pitfalls in implementing the VMI

Thanks