Collaborative VMI
A hybrid approach that shares more of the benefits across trading partners.
Last year I wrote “Why Vendor Managed Inventory Makes Sense…” for Private Label and outlined three driving factors for the growth of vendor managed inventory (VMI) in the private label market:
- Limited distribution with greater SKU portfolios,
- Better buyer-seller collaboration, and
- More control.
Since writing that article, I have spoken with many colleagues in private label and VMI continues to be a growing area of interest for improving supply chain operations.
In the past, many considered VMI too one-sided, placing the process burden on the seller while the buyer received all of the benefits. This is changing. As a result of the global economic downturn, many companies have turned to closer collaboration with key partners as a way to improve efficiency, reduce costs and drive a more profitable supply chain. VMI is gaining momentum.
A Hybrid Approach
Today, we see the traditional data-intensive VMI process merging with the best of Collaborative Planning, Forecasting and Replenishment® (CPFR) to form Collaborative VMI, a process which shares more of the benefits across trading partners. This hybrid approach to VMI provides many tangible benefits to the buyer and seller and breaks down many of the perceived barriers VMI and CPFR have encountered. Collaborative VMI takes the best of both worlds by adopting a process that can truly deliver on the promises of collaboration. In a recent poll, we found the list of benefits for both parties growing substantially.
The premise behind Collaborative VMI is to make sure all trading partners proactively talk and work with each other to share information. The key is to make sure you are set up for success, that you have the right foundation that enables long-term growth. The following are three of the key steps to collaborative VMI success.
Select the Right Trading Partner – As a supplier in private label you need to get as close to your retail partner as possible. After all, you are serving them with brand-specific product, dedicated to their channel. While it may seem obvious, it is absolutely the most important step to get right. You need to select partners that share similar business values. You will be sharing sensitive information with someone outside your organization and trustworthiness is paramount. Evaluate yourself as well as potential partners, do not rush through this step.
Understand the Data – Defining the data requirements and the sources of the data are the key technical tasks in deploying Collaborative VMI. This can include Point of Sale (POS), new product introductions, inventory transactions, baseline forecasts, and planned promotional activity, among other data points.
Without the right supply chain planning tools this can quickly turn into a complicated matter. For example, inventory optimization is a key function. In a Collaborative VMI relationship, understanding the optimal locations for inventory in a multi-echelon environment can dramatically change the effectiveness of a program.
Automate Where Possible – Collaborative VMI is based on the blending of the traditional VMI process with the more collaborative approach of CPFR.
There were two key issues with the original VMI process. First, it was a data-driven process that did not easily allow for manual intervention. Data was transformed and transmitted via EDI from one trading partner to another. Systems made decisions based on that data and rightly, or not, replenishment orders were generated. The second issue was a lack of exception management. There were few, if any, process alerts built into the original framework. While alerts were present on the seller side, such as “the seller is planning item ‘A’ but the buyer doesn’t have item ‘A’ in their plans,” there was no alert in their planning process that told them “the seller’s forecast for item ‘A’ changed by ‘n’ percent since the planning cycle.” These anomalies could greatly impact both parties’ ability to satisfy demand.
The main concern with CPFR was that it was seen as too rigid and time-consuming because many companies managed it in spreadsheets. While this was partially corrected overtime, the perception still remains to this day. Collaborative VMI, however, takes a better approach—automating where possible and alerting key parties when needed.
The success of any program is to make sure everyone is on board. To do this, users have to trust the process, understand the benefit to them personally, automate where possible, and establish a smooth transition/migration path. Collaborative VMI’s success lies in the ability for technology to simplify, automate and scale the process.
*Karin L. Bursa is vice president of marketing at Logility, a provider of collaborative supply chain management solutions. Ms. Bursa has more than 24 years of experience in the development, support and marketing of software solutions to improve and automate enterprise-wide operations. For more information, please visit www.logility.com.
