How to succeed at supply-chain collaboration

Years of lackluster attempts to improve supply chain efficiency have prompted a back-to-basics approach to supply chain planning. Many manufacturers and retailers are realizing the value of elevating tried-and-true collaborative supply chain processes, most notably vendor managed inventory (VMI).

Enabled by the pervasive use of electronic data interchange (EDI), VMI emerged in the late 1990s as a way for suppliers to manage the replenishment of inventory for their retailer partners. Recently, there has been a resurgence of interest in VMI programs from suppliers, especially those in the consumer products market, as a practical approach to lowering inventory within the supply chain and as a key first step to enhancing partner collaboration.

As with many collaboration initiatives, VMI programs are often undermined before they are started. This is especially true when technology is applied without the proper organizational infrastructure. The following tips will help align the right people, processes and technology for successfully implementing VMI.

View VMI as a collaborative partnership vs. a transactional relationship

The ill-fated and all-too-typical scenario for starting a VMI program is a retailer's request to its suppliers, resulting in a negative response from suppliers' management teams. Suppliers often see the program as a retailer's attempt to push inventory cost and risk back down the supply chain. This is an unfortunate reaction, since VMI presents enormous opportunities for suppliers as well as their various stakeholders.

The first key to a successful VMI program is to establish and articulate a clear, agreed-upon motive for VMI, beyond "the retailer said so." To do this, it's necessary to establish a relationship between the supplier and retailer management teams to develop mutually beneficial goals, monitor progress and resolve potential conflicts.

An initial kickoff meeting with the retail customer is crucial to establish the goals and scope of a program. During this meeting, it's necessary to agree on short- and long-term goals of the program and data points and key assumptions that will be used to manage the process. It's also important to come to a consensus on how any exceptions to the standard VMI process will be managed, e.g., how promotional plans will be communicated.

Ultimately, this senior-level interaction and communication will lend significant credibility and visibility to the VMI program.

Integrate VMI into overall business processes, especially inventory management

This next step must consider the available people, processes and technology infrastructure required to execute VMI. Many companies already have these resources at their disposal, so a careful assessment of the organization's existing capabilities is important.

People. In many cases, customer service is the most appropriate department to own VMI, because it already has a relationship with the retailer's buyers and planners. For other organizations, a dedicated group of demand planners or VMI analysts may spearhead the program.

Processes. Cross-organizational communication is essential to integrating VMI into all inventory-management activities. If the employees responsible for internal inventory management have no way to effectively communicate with the VMI analysts, the supplier is faced with two groups trying to manage the same products with limited information-sharing. The impact of such disjointed interdepartmental communication is especially evident when attempting to manage supply chain exceptions. For example, significant problems with customer service and inventory levels are a likely outcome when retail promotions cause exceptions to standard replenishment processes that result in excess inventory or potential out-of-stock situations.

Regular meetings between the supplier's management team and VMI analysts with the trading partner will be critical in the beginning stages of the relationship.

Technology. Typically, the exchange of inventory data between supplier and trading partners involves inbound EDI 852 data to the supplier and outbound 855/875 data to the trading partner. This exchange of information in disparate forms requires data integration capabilities so that the IT group isn't overburdened.

The related issue of data integrity is another often-overlooked technology challenge. A VMI program can track data points, including inventory rules, purchase-order numbers and customer information. The trading partner and supplier must come to an agreement on these data points and determine which will be "active" or consistently managed and exchanged between supplier and retailer. Any inaccuracies or inconsistencies in these data points can cause frustration and disrupt collaboration.

VMI analysts should also have a tool to manage forecasts, inventory policy and orders with an easy-to-use interface and a focus on management by exception. The automation of exception management will allow the analysts to handle more than one VMI relationship at a time because they won't need to review every transaction. Instead, the analyst can focus on monitoring only those situations where an exception might occur, such as an out-of-stock case.

Elevate VMI beyond inventory replenishment to a strategic value-add

Once VMI is internally integrated and the people, processes and technology resources are properly aligned, suppliers need to take full advantage of the information they have generated. A successful VMI program allows the supplier not only to order product within lead-time, but also to extend the planning horizon to look for future strategic opportunities.

This is where suppliers can really generate benefits from VMI because they have an opportunity to assist the retailer in long-term inventory planning.

Devise a method of measuring success

Every VMI program needs a way to justify technology investments and other organizational resources devoted to the process. This is usually best achieved through a scorecard methodology. The senior executives on both sides of the relationship should work together to establish a few key measurements to highlight the success and challenges of the VMI relationship.

Initial metrics to evaluate include inventory turns, service level and inventory levels. Trading partners should focus on only a select handful of measures, or too broad a scope will make it difficult to identify the program's overall progress. In addition to identifying the measurements, a regularly scheduled review of the results is needed.

The most successful VMI relationships are those that benefit both parties. By staying focused on the alignment of people, processes and technology, as well as communication with trading partners, a supplier can make vendor-managed inventory a strategic initiative and competitive advantage.

Jane Hoffer is president and CEO of Prescient, a West Chester, Pa.-based supply chain planning company for the consumer products industry.


Copyright © 2003 IDG Communications, Inc.

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