Vendor-managed inventory is back in fashion, it seems, with even the big hitters enthusiastic about its benefits. But how far does it go as a solution to availability problems, asks Elaine Watson
If you thought VMI was one acronym the industry had finally consigned to the dustbin of history, think again. It might be dressed up as something else, but vendor managed inventory (where suppliers take responsibility for managing retailers’ stocks) is still alive and kicking in UK grocery retail.
A clutch of mid-tier retailers and symbol groups now swear by it, manufacturers are increasingly using it with their raw materials suppliers and even Tesco is now operating VMI projects with 11 suppliers in categories from home entertainment to soft drinks.
The results speak for themselves, says Gary Coombe, general manager customer business development at Procter & Gamble, which has been operating VMI with Tesco for the best part of a year.
“VMI has meant better availability and lower costs for Tesco because of lower inventory, while it helps us with our production needs.”
Diageo, which has recently embarked on VMI projects with a clutch of raw materials suppliers, is equally enthusiastic, while Big Food Group, Booker, Londis and The Co-operative Group all claim to have improved availability and cut stock through Co-Managed Inventory (CMI) and VMI projects with software company JDA.
One area where VMI has worked very effectively in the UK is home entertainment - an obvious area where suppliers are better placed than retailers to predict demand, says Entertainment UK - a key supplier to retailers including Tesco and Waitrose.
While store replenishment systems can tell a retailer how many copies of a particular CD it sold last week and how many are still in stock, other historical information that is usually factored into generating a purchase order is irrelevant because every new CD or DVD is effectively a new product, with an unpredictable demand pattern, points out a spokesman. And this makes it hard for the retailer to come up with a sensible order. In other words, knowing how many copies of Britney Spears’ last album you sold won’t necessarily help you predict demand for her new one.
It might not be true of baked beans, but when it comes to chart music, the supplier is more likely to know whether a new artist is going to be a hit than the retailer as it has a broader picture of how the CD is performing in the market.
The key to a successful VMI project is establishing what both parties expect to achieve, and then changing your business processes accordingly, says Joe Dybell, Tesco food supply director. Otherwise, you are merely shifting responsibilities rather than adding any value.
A logistics director at a UK supplier sums this up succinctly in Insight Research’s latest report on VMI: “If a retailer just gives you the same rules to play by that he’s giving to his internal stock management team, you’re just transferring responsibility for one task in the supply chain and therefore moving cost from one to the other.”
At Tesco, therefore, the emphasis is on changing processes rather than transferring roles, stresses Dybell.
“For the companies that are involved, VMI is very successful as it integrates one of the supplier team into the Tesco team for planning and activity purposes. The job is not a transfer - we have not reduced our headcount as result of VMI. The role is different.
“During summer 2003 - the hottest summer for 45 years - a soft drinks VMI supplier delivered a very high service level for soft drinks,” he says. “By contrast, the overall soft drinks availability was much lower. The VMI team delivered additional orders overnight, on short order lead time. VMI works effectively when suppliers make appropriate changes to their processes upstream.”
In many cases, suppliers are better placed to manage stocks than retailers because they are typically dealing with just a handful of SKUs rather than several thousand, he adds. “One of the Tesco team ordering might have 4,000 stock-keeping units in their portfolio. A typical VMI supplier would have 250.”
Potentially, VMI can work in any category, he adds: “All categories have the potential to benefit from VMI as long as they are able to influence availability and production for their company to respond to the customer.”
So why isn’t everyone doing it? On paper, says Bharat Popat at B2B collaboration experts GNX, VMI is a no-brainer. If suppliers know what volumes retailers are shifting and how much stock is in their supply chains, they can devise the most efficient way to service their customers, optimise their transport and plan their production more efficiently. In practice, however, UK retailers have the lowest stock and the most efficient automated replenishment systems in the world, and they are not going to see a dramatic drop in inventory simply by putting suppliers in charge of keeping shelves full.
Likewise, they are also world leaders in factory gate pricing, which gives retailers still more control over their own stocks - hardly conducive with VMI, he points out.
Moreover, technologies such as RFID, which are being looked at seriously by UK retailers, could also make VMI redundant as supply chains become more automated, says Brian Morgan, a director at b2b e-commerce specialist GXS. If both trading partners have access to real-time, accurate data across the supply chain, which in turn powers automated replenishment systems, he observes, the question of who actually raises the purchase order is probably irrelevant.
Even its staunchest supporters recognise that a one-size-fits-all approach to VMI doesn’t work, says Chris Poole, Procter & Gamble’s logistics director UK and Ireland. “Above all else, our focus is to collaborate with customers to create value. VMI has played its part in this and we do it with some customers where it makes sense. However, with UK retailer inventories among the lowest in the world, the opportunities to create value together in the supply chain are developing beyond VMI.”
Indeed, there is plenty of evidence to suggest that if retailers are serious about improving availability, they should stop quibbling over who generates the purchase order and get to grips with the primary cause of out of stocks: poor instore logistics and inaccurate bookstock.
Vendor managed or collaborative forecasting and replenishment is all very well, says Brian Gaunt, Christian Salvesen’s UK managing director, and a former supply chain director at Asda. But it is merely “tinkering at the edges of the on shelf availability issue”.
He adds: “I lost count of the number of presentations I did at Asda on VMI. Looking back, I think the focus was all wrong. The real problems are in the store.”
>>supplier makes sure the retailer has enough stockVMI hands responsibility for managing a retailer’s stock levels to the vendor (supplier), so the supplier raises his own purchase order.
Suppliers are given access to a retailer’s EPoS and depot stock levels and tasked with ensuring the retailer has enough stock to meet demand.
A big hit in the US and continental Europe, where it took hold in the late 1980s through retailers such as Wal-Mart and Carrefour, VMI has driven significant reductions in inventory as increased visibility and collaboration have reduced the need for buffer stock and helped suppliers plan production more efficiently and optimise transport. Large manufacturers such as Kraft and P&G are also particularly keen.
The UK multiples experimented with VMI and other B2B applications such as collaborative planning, forecasting and replenishment in the late 1990s, but it has been the symbol groups and mid-tier retailers/wholesalers that have taken the lead this side of the pond.
What is VMI?
If you thought VMI was one acronym the industry had finally consigned to the dustbin of history, think again. It might be dressed up as something else, but vendor managed inventory (where suppliers take responsibility for managing retailers’ stocks) is still alive and kicking in UK grocery retail.
A clutch of mid-tier retailers and symbol groups now swear by it, manufacturers are increasingly using it with their raw materials suppliers and even Tesco is now operating VMI projects with 11 suppliers in categories from home entertainment to soft drinks.
The results speak for themselves, says Gary Coombe, general manager customer business development at Procter & Gamble, which has been operating VMI with Tesco for the best part of a year.
“VMI has meant better availability and lower costs for Tesco because of lower inventory, while it helps us with our production needs.”
Diageo, which has recently embarked on VMI projects with a clutch of raw materials suppliers, is equally enthusiastic, while Big Food Group, Booker, Londis and The Co-operative Group all claim to have improved availability and cut stock through Co-Managed Inventory (CMI) and VMI projects with software company JDA.
One area where VMI has worked very effectively in the UK is home entertainment - an obvious area where suppliers are better placed than retailers to predict demand, says Entertainment UK - a key supplier to retailers including Tesco and Waitrose.
While store replenishment systems can tell a retailer how many copies of a particular CD it sold last week and how many are still in stock, other historical information that is usually factored into generating a purchase order is irrelevant because every new CD or DVD is effectively a new product, with an unpredictable demand pattern, points out a spokesman. And this makes it hard for the retailer to come up with a sensible order. In other words, knowing how many copies of Britney Spears’ last album you sold won’t necessarily help you predict demand for her new one.
It might not be true of baked beans, but when it comes to chart music, the supplier is more likely to know whether a new artist is going to be a hit than the retailer as it has a broader picture of how the CD is performing in the market.
The key to a successful VMI project is establishing what both parties expect to achieve, and then changing your business processes accordingly, says Joe Dybell, Tesco food supply director. Otherwise, you are merely shifting responsibilities rather than adding any value.
A logistics director at a UK supplier sums this up succinctly in Insight Research’s latest report on VMI: “If a retailer just gives you the same rules to play by that he’s giving to his internal stock management team, you’re just transferring responsibility for one task in the supply chain and therefore moving cost from one to the other.”
At Tesco, therefore, the emphasis is on changing processes rather than transferring roles, stresses Dybell.
“For the companies that are involved, VMI is very successful as it integrates one of the supplier team into the Tesco team for planning and activity purposes. The job is not a transfer - we have not reduced our headcount as result of VMI. The role is different.
“During summer 2003 - the hottest summer for 45 years - a soft drinks VMI supplier delivered a very high service level for soft drinks,” he says. “By contrast, the overall soft drinks availability was much lower. The VMI team delivered additional orders overnight, on short order lead time. VMI works effectively when suppliers make appropriate changes to their processes upstream.”
In many cases, suppliers are better placed to manage stocks than retailers because they are typically dealing with just a handful of SKUs rather than several thousand, he adds. “One of the Tesco team ordering might have 4,000 stock-keeping units in their portfolio. A typical VMI supplier would have 250.”
Potentially, VMI can work in any category, he adds: “All categories have the potential to benefit from VMI as long as they are able to influence availability and production for their company to respond to the customer.”
So why isn’t everyone doing it? On paper, says Bharat Popat at B2B collaboration experts GNX, VMI is a no-brainer. If suppliers know what volumes retailers are shifting and how much stock is in their supply chains, they can devise the most efficient way to service their customers, optimise their transport and plan their production more efficiently. In practice, however, UK retailers have the lowest stock and the most efficient automated replenishment systems in the world, and they are not going to see a dramatic drop in inventory simply by putting suppliers in charge of keeping shelves full.
Likewise, they are also world leaders in factory gate pricing, which gives retailers still more control over their own stocks - hardly conducive with VMI, he points out.
Moreover, technologies such as RFID, which are being looked at seriously by UK retailers, could also make VMI redundant as supply chains become more automated, says Brian Morgan, a director at b2b e-commerce specialist GXS. If both trading partners have access to real-time, accurate data across the supply chain, which in turn powers automated replenishment systems, he observes, the question of who actually raises the purchase order is probably irrelevant.
Even its staunchest supporters recognise that a one-size-fits-all approach to VMI doesn’t work, says Chris Poole, Procter & Gamble’s logistics director UK and Ireland. “Above all else, our focus is to collaborate with customers to create value. VMI has played its part in this and we do it with some customers where it makes sense. However, with UK retailer inventories among the lowest in the world, the opportunities to create value together in the supply chain are developing beyond VMI.”
Indeed, there is plenty of evidence to suggest that if retailers are serious about improving availability, they should stop quibbling over who generates the purchase order and get to grips with the primary cause of out of stocks: poor instore logistics and inaccurate bookstock.
Vendor managed or collaborative forecasting and replenishment is all very well, says Brian Gaunt, Christian Salvesen’s UK managing director, and a former supply chain director at Asda. But it is merely “tinkering at the edges of the on shelf availability issue”.
He adds: “I lost count of the number of presentations I did at Asda on VMI. Looking back, I think the focus was all wrong. The real problems are in the store.”
>>supplier makes sure the retailer has enough stockVMI hands responsibility for managing a retailer’s stock levels to the vendor (supplier), so the supplier raises his own purchase order.
Suppliers are given access to a retailer’s EPoS and depot stock levels and tasked with ensuring the retailer has enough stock to meet demand.
A big hit in the US and continental Europe, where it took hold in the late 1980s through retailers such as Wal-Mart and Carrefour, VMI has driven significant reductions in inventory as increased visibility and collaboration have reduced the need for buffer stock and helped suppliers plan production more efficiently and optimise transport. Large manufacturers such as Kraft and P&G are also particularly keen.
The UK multiples experimented with VMI and other B2B applications such as collaborative planning, forecasting and replenishment in the late 1990s, but it has been the symbol groups and mid-tier retailers/wholesalers that have taken the lead this side of the pond.
What is VMI?
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