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Uploaded byDr. Tapish Panwar
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Continuous replenishment and vendor managed inventory

This document discusses the implementation of a vendor managed inventory (VMI) system between a global energy management specialist company and its distributors. Key benefits included decreased stockouts and inventory levels for distributors through improved forecasting, as well as workload and cost reductions. The VMI system provided visibility into sales data to help manufacturers plan production more efficiently. The implementation led to stronger partnerships between companies in the supply chain.

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Continuous Replenishment Programme (CRP) GOALS:  Focus on efficient replenishment of  Increase inventory turns products  Reduce inventory levels  Part of Efficient Consumer  Decrease stock-outs Response (ECR) arena  Improve customer service  Improving the flow of products in levels  Boost warehouse efficiency the supply chain  Enhance trading partners' perception of value Vendor Managed Inventory (VMI)  Manufacturer decides when to OBJECTIVES: replenish Increase in-stock inventory  Usage of automatic electronic Increase sales messages Improve customer service  VMI implementation in industries Increase gross margins like, department Reduce overall inventory in stores, apparel, automotive and the supply chain paper manufacturing Stabilize vendor's production
Vendor Managed Inventory (VMI) model From the supplier's perspective, a VMI model generally entails: 1. Receiving stock levels from a customer 2. Receiving sales forecasts from a customer 3. Generating replenishment orders when needed 4. Sending dispatch advice to a customer 5. Receiving sales reports from a customer 6. Sending invoices to a customer. Fig. A two stage VMI supply chain
Information Flow Inventory levels – From distributor to Sales history – From distributor to manufacturer manufacturer  The current stock quantity The quantity sold over the last  The quantity in order period  The quantity reserved for some The number of sold lines customer orders Forecasts can also be provided  The backorder quantity (stock out) by the distributor Order proposal – From manufacturer to distributor The Ship To location  The order quantity Manufacturer Inventory Level Distributor Final Sales history Customers Order Proposal Final Purchase Order Customer Order need 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
VMI implementation for a Global Energy Management Specialist
Mission •Help our customers to achieve more while using less of our common planet •Safe Goals •Reliable •Efficient •Productive Business •Power and Control •Energy Management
• Common goal to improve services to end- customer Dual Benefits • Partnership leading to strong and long-term ties between distributor and manufacturer Distributor • Decrease in stock-outs and inventory levels Benefits • Reduction in planning and ordering cost • Visibility of the Distributor’s Sales data makes forecasting easier Manufacturers • Promotions can be more easily incorporated Benefits into the inventory plan. • A reduction in Distributor ordering errors
Inventory Sales Order levels history proposal Daily Monthly Daily or set days of a Current stock week quantity Quantity sold over the last period Quantity in order References and the Number of sold lines Quantities for Quantity reserved ordering • The Ship-to-location Forecasts from Backorder quantity • The order quantity Distributor
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
VMI implementation for a Global Energy Management Specialist
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
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
VMI implementation for a Global Energy Management Specialist
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
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
With cases from the Indian market
 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
Challenge • Controlling sewing thread inventories • The manufacturer alone would calculate and order Pre VMI the total quantity of thread, with any surplus or Process shortage being the manufacturer's problem • The onus of any surplus or shortage was shifted totally to Strategy the thread supplier • The demand pattern (based on the production schedule) was shared with the thread supplier • Barring some standard colour like white or black, thread is a perishable item so the thread supplier Result 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
 The manufacturer blocks certain quantities of thread with the thread supplier, The thread supplier avoids  who then maintains the complicated reverse entry of thread inventory and goods if there is a surplus delivers products just-in-  The manufacturer avoids time when required by the being left with surplus manufacturer stock, while guaranteeing  Blocking thread quantities is against out of stock only valid for a certain period of time, after which  The responsibility for the thread supplier is free to calculating the correct sell the thread to other quantity still remains with the manufacturers manufacturer Geographical proximity between both companies
 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.
 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
Some examples of companies which chose to implement VMI
K-Mart Fred Mayer Walmart and P&G •Customer service •Reduced inventories •Have had a VMI measures have gone 30-40 per cent program together for from the high 80s to the •Service levels increased over ten years to high 90s to 98 per cent manage the inventory •Inventory turns on •VMI implemented with and production of seasonal items have two key food vendors disposable gone from 3 to diapers, with great between 10 and success 11, and for non- •Turnover doubled seasonal items from 12- •Wal-Mart's operating 15 to 17-20 costs fell •P&G's market share grew (because Wal- Mart gave it preferred shelf space)
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
Continuous replenishment and vendor managed inventory
Continuous replenishment and vendor managed inventory