A more collaborative relationship with our customers and suppliers will benefit all concerned. Vendor Managed Inventory (VMI) is one way to develop a more collaborative relationship and many companies have tried it. Some have even had success in achieving both financial and operational benefits. But often it is only the customer who benefits from VMI. Vendor Managed Supply, (VMS) is a truly collaborative relationship that delivers what has long been expected of VMI and more. Leading companies are going beyond VMI to adopt Vendor Managed Supply because they recognise that it is vital that key suppliers also benefit.
What is Vendor Managed Supply?
In a typical VMI process the supplier gains visibility of customer stock and the responsibility to replenish that stock. This is often a first step to building mutual advantage by transferring some responsibility from customer to supplier. However, the supplier may also be compelled to take financial ownership of the stock on customer site. Typically the timing and quantity of stock replenishment is triggered by the inventory level dropping to a target replenishment level. The supplier is then expected to deliver within an agreed timescale to avoid a stock-out occurring.
A Vendor Managed Supply environment will not only provide the supplier with visibility of customer stock and the responsibility to replenish that stock, but also extend the supplier’s opportunity far beyond that of merely reacting to changes in inventory levels: to have the freedom to manage the whole process.
This is an environment where the supplier is able to determine the response which is most appropriate to meeting customer needs. This means, rather than holding excessive inventory (just in case), the supplier has the opportunity to balance investment across all three supply chain levers:
- Predicting demand
- Hedging through capacity and inventory
- Responding to triggers
The balance of investment is dependant on the characteristics of the supply chain environment and can quickly be determined. Irrespective of the chosen approach, the customer will need to support the supplier by providing more information or even involve the supplier in more planning and scheduling decisions.
Prerequisites to success
Success will depend not only upon the parties recognising and agreeing formally the nature and extent of the delegated responsibility and their individual objectives but recognising that, in terms of policy :-
- this is decidedly not simply a means for the customer to dump stock on his supplier
- the customer must surrender to the supplier the responsibility for managing his stock
- that, in terms of process:-
- there requires to be a formal mechanism to share knowledge and detailed information, particularly in relation to future demand patterns
- there exists a series of action plans to be invoked in times of issue
and that having determined the policy and defined the process, a rigorous approach to implementation can secure the benefits anticipated from VMS.
The benefits
With robust business processes and policies in place, VMS builds mutual advantage and realises significant short and long term benefits for customer and supplier alike, mainly through dramatically reduced uncertainty. VMS allows the supplier to manage the business in a way that ensures and even improves continuity of supply but does not necessarily mean an increase in working capital tied up in inventory. Typically the benefits of a well implemented VMS process are:-
- Significant reduction in working capital for the customer through efficient management of stock levels and for the supplier through the use of carefully planned supply patterns and stock levels
- increased reliability of supply for the customer
- increased predictability of need for the supplier
- reduced cost of operations for both.
Who benefits?
The characteristics of a supply chain will indicate whether or not it can benefit from VMS. A quick assessment of these characteristics will clearly indicate where there is value in proceeding with the task of implementation. This means it is possible to focus only on the supply chains that stand to benefit most, without performing costly pilots.
Implementation
It goes without saying that there will be obstacles to achieving optimum benefit from the VMS environment. Successful implementation will depend both upon their recognition and the development of an approach which is tailored to overcome them. Our experience is that many of these arise from the fact that, inevitably customer and supplier have conflicting objectives which require to be resolved.
However, often overlooked is the impact of the business culture and approach of the respective partners. No matter how well the policies and processes are configured, the people element plays a very significant part in achieving a successful implementation.
Removal of these obstacles and reconciliation of the sources of conflict are vital to the successful implementation.
Two overarching principles should be applied throughout:
1. Vendor Managed Supply environments business processes enabling technology and, perhaps most important of all, people’s behaviour.
2. Businesses are driven by uncertainty from demand, supply, capital, cash, markets, behaviour.
and their influence can be highly volatile. It is vital to provide a sound basis for exploiting the potential benefits of VMS which recognises these principles. It must set out to harmonise the conflicting aims of customer and supplier and to define and remove potential obstacles.
The development of a successful and dynamic operational environment can be achieved though:
- an insight into the essential features of the processes themselves
- a carefully selected portfolio of assessment and simulation tools for the use of the implementation team which help define and quantify potential obstacles and areas of conflict
- a specifically tailored set of management tools to address these issues, to ensure a successful implementation and to realise optimum benefit
- a background of experience in Supply Chain Management.
Summary
A focus on developing people’s behaviour is an essential step in preparing the ground for a successful Vendor Managed Supply initiative. Both parties will achieve significant benefits if they adjust their policies and processes to reconcile the conflicts that have sometimes limited the success of these initiatives. A focus on developing peoples behaviour to prepare the ground for new processes and technology not only ensures that the benefits from VMS are realised, but also can provide a lasting benefit in that the framework is one which is transferable to all aspects of operations – change and routine alike.
Alan is a founder and director of Forward Solutions
(http://www.forward-solutions.com) – a management consultancy that helps
businesses with complex manufacturing options to achieve more lean and
predictable performance by reducing operational uncertainty. In 14 years
as a supply chain professional, working with companies from sectors
including chemicals, pharmaceuticals, consumer goods and hi-tech, Alan
has brought value to many organisations through the implementation of
enterprise wide solutions. He has worked with industry leaders
including: BP, Bridgestone-Firestone, Akzo Nobel, Mller, Wedgwood,
Motorola and Baxter Healthcare.
