Northern Foods boss Stefan Barden isn’t afraid to do things differently. While this time he is not taking a stand against a major retailer over supply terms as he did last year – abandoning a £45m contract with M&S in the process – his new move has certainly raised eyebrows. Northern is discussing taking control of its stock in Sainsbury's. In return, it is understood to have proposed Sainsbury's only pay for stock once it has been sold. Talks are in very early stages, but the move signals the potential return of vendor-managed inventory (VMI) to the grocery sector after a few years out of favour. Experts suggest technological improvements make VMI more viable than it once was.
However, others warn relations in the supply chain may not be good enough to make such collaborative projects successful. VMI is typically used in sectors where suppliers feel they are better able to forecast demand than retailers. It has been used in supermarkets with books, DVDs and electricals. EUK, accepted as the most successful part of Woolworths before its demise, managed its own inventory for supermarket customers, for instance.
“VMI was an obvious option for specialist companies such as EUK,” says Richard Nicholas of TXT e-solutions, which managed the company’s VMI IT. “It gives producers better visibility and control over their supply chain. Producers already have availability and wastage teams that monitor but have no control. This lets them use the skills and people they already have, and embeds them closer with their key retailers.”
Previous attempts by grocery suppliers to manage inventories suffered because handling sales data and forecasts is labour-intensive and costly, but Nicholas says technological improvements have made the process simpler. Technology aside, barriers to VMI remain. Northern still has to persuade Sainsbury's it, too, will benefit from the arrangement and in this case the sweetener is understood to be in the proposal to allow Sainsbury's to pay for stock after customer purchase.
“If Sainsbury's accepts a VMI deal, it is accepting some loss of control over its supply chain,” Nicholas says. “In exchange for that, it gets better payment terms.”
If rumour is to be believed, Northern Foods is not alone in re-assessing VMI, with several leading drinks manufacturers said to be toying with the idea. But after a year of fraught relations between retailers and manufacturers, the time may not be right to enter complex collaborative deals.
“In grocery the collaborative approach, let alone VMI, is in decline,” says Don Brenchley, supply chain IT consultant for JDA Software. “VMI needs a good relationship and shared objectives, such as improving availability.”
VMI works well when supply chains are working well, he adds, allowing retailers to reduce inventory and vendors to streamline their supply chain, he says. But when unexpected events occur, the relationship is tested. Retailers using VMI keep lower inventory so if supply issues arise could be the first to find themselves with empty shelves unless the supplier prioritises them.
Another barrier to a large-scale revival of VMI is the efficiency of UK retailers – it’s hard to improve on their performance. VMI activities typically result from suppliers’ frustrations at badly managed retail processes, says Brenchley.
“Possibly for this reason, VMI has caught on in several EU markets,” he says. “But the slick retail operation in the UK means this has not been the case here. A better approach is perhaps to stop short of VMI and work with retailers in other ways: this couples the breadth of knowledge of the retailer with the depth of product knowledge of the manufacturer.”
So the odds are against VMI making a large-scale return, but if Barden’s single-minded approach is anything to go by, Northern Foods may have its way yet.