RETAILER SUPPLIER PARTNERSHIPS SUPPLY CHAIN MANAGEMENT AND LOGISTICS
CONTENTS
Introduction
3
Types of Strategic Alliances
4
Retailer-Supplier Retailer-Supplier Partnerships(RSP) Partnerships(RSP)
5
Types of RSP
5
VMI
5
Advantages
7
Challenges
8
Indian Examples: Maruti and Shopper’s Stop
11
Characteristics of Retailer-Supplier Retailer-Supplier Partnership
13
Requirements for Retailer-Supplier Partnership
14
Inventory ownership in Retail-Supplier Partnerships
15
Issues in Retailer-Supplier Retailer-Supplier Partnerships Implementation
15
Steps in Retailer-Supplier Retailer-Supplier Partnerships Implementation
16
Advantages of Retailer-Supplier Partnerships
17
Disadvantages of Retailer-Supplier Partnerships
17
Bibliography
18
2
Introduction
Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible. possible. Supply Supply chain management management spans all movement movement and storage storage of raw materials, materials, work-inwork-in process process inventory, inventory, and finished finished goods from point-of-orig point-of-origin in to point-of-cons point-of-consumpti umption. on. The term supply chain management was coined by consultant Keith Oliver, of strategy consulting firm Booz Allen Hamilton in 1982. Supply Chain Management encompasses the planning and management of all activities involved in sourci sourcing, ng, procur procureme ement, nt, convers conversion, ion, and logist logistics ics managem management ent activit activities ies.. Import Importantl antly, y, it also also incl include udess coord coordina inati tion on and colla collabor borati ation on with with chann channel el part partner ners, s, which which can can be supp suppli lier ers, s, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies. Key players in SCM are:
There There are a number number of strate strategic gic allianc alliances es amongst amongst the above above mentio mentioned ned player players. s. A Strate Strategic gic Alliance is a formal relationship formed between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing manufacturing capability, project funding, capital equipment, equipment, knowledge, knowledge, expertise, expertise, or intellectual intellectual property. property. The alliance is cooperation cooperation or collaboration which aims for a synergy where each partner partner hopes that the benefits from the alliance will be greater than those from individual efforts. The allianc alliancee often often involve involvess technol technology ogy transfe transferr (access (access to knowled knowledge ge and experti expertise), se), economi economicc specialization, shared expenses and shared risk
3
Benefits of Strategic Alliances
Strategic alliances often bring partners the following benefits: •
Access to their partner's distribution channels and international market presence
•
Access to their partner's products, technology, and intellectual property
•
Access to partner's capital
•
New markets markets for for their their products products and services services or or new products products for their their customers customers
•
Increased brand awareness through partner's channels
•
Reduced product development time and faster-to-market products
•
Reduced R&D costs and risks
•
Rapidly achieve scale, critical mass and momentum (Economies of Scale - bigger is better)
•
Establish technological standards for the industry and early products that meet the standards
•
By-product utilization
•
Management skills
Types of Strategic Alliances
Third Party Logistic: 3PL is the use of an outside company to perform all or part of the
firm’s material management and product distribution functions.
It’s the format formation ion of strateg strategic ic allianc alliances es between between the Retailer-Supplier Retailer-Supplier Partnerships: Partnerships: It’s retailers and their suppliers.
Distributor Distributor Integration: Integration: This appreciates the value of the distributors and their relationship
with the end users and provides them with the necessary support to be successful.
4
Retailer-Supplier Partnership
It’s the formation of strategic alliances between the retailers and their suppliers. Types of Retailer-Supplier Partnerships •
Quick Response Strategy: Strategy: Here Here suppli suppliers ers receive receive Point Point of Sale Sale (POS) (POS) date date from from the
retailers and use this information to synchronize their production and inventory activities with actual sales at the retailer. In the strategy the retailer still prepares individual orders, but the POS data are used by the supplier supplier to improve improve forecasting forecasting and scheduling scheduling and to reduce local time. This system could be preferred when the retailer-supplier relationship is new, and trust between the two parties has not been fully developed yet. In this strategy, the retailer has complete control on its inventory, but helps suppliers improve operations by providing providing POS data. data. Additional Additionally, ly, this type type of partner partnership ship could could be preferred preferred if if financial financial and personnel personnel resources resources to to develop a more integrat integrated ed relationship relationship are are not available available.. •
Continuous Replenishment Strategy: This is also called rapid replenishment. Here the
vendors receive POS data and use these data to prepare shipments at previous agreed- upon interv intervals als to maintai maintain n specif specific ic levels levels of inventor inventory. y. In an advance advanced d form form of continuo continuous us repleni replenishm shment ent,, suppli suppliers ers may gradual gradually ly decrease decrease inventor inventory y levels levels at the retail retail store store or distribution distribution center as long as the service levels are met. Thus, in a structured structured way inventory levels are continuously improved. Also the inventory levels need not be simple levels, but could be based on sophisticated models that change the appropriate level based on seasonal demand, promotions, and changing customer demand. This type of partnership is a system between between quick response response and VMI, VMI, because suppliers suppliers and buyers together together agree on target inventory inventory and service service levels. It involves less risk for retailers than VMI, and typically leads to a more stable and long-term relationship between suppliers and retailers than quick response does. •
VendorVendor-Ma Manag naged ed Inventor Inventory y (VMI) (VMI) System: System: This This is also also calle called d vendo vendorr-ma manag naged ed
replenishment (VMR) system. Here the supplier decides on the appropriate inventory levels 5
of each of the products and the appropriate inventory policies to maintain these levels. In the initial stages vendor suggestions must be approved by the retailer but eventually the goal of many VMI programs is to eliminate retailer oversight on specific orders. This type of relationship is being used in Wal-Mart and P&G, whose partnership began in 1985. It has dramatically improved P&G’s on time deliveries to Wal-Mart while increasing inventory turns. This system is more integrated than the previous two systems, and requires a high level of trust between the supplier and the buyer. If implemented properly, VMI can lead to more more overall overall system savings savings than than the other other two types types of partne partnershi rships. ps. Howeve However, r, VMI VMI
requ requir ires es more more comm commit itme ment nt,,
and and
init initia iall lly, y, sign signif ific ican antt
inve invest stme ment nt in info inform rmat atio ion n
infrastructure, time and personnel.
6
Benefits of VMI Process
The VMI process brings benefits for both retailers and suppliers. Some of those benefits are listed below.
Retailer Benefits •
Reduced inventory : This is the most obvious benefit of VMI. Using the VMI process, the
supplier is able to control the lead-time component of order point better than a customer with thousands of suppliers they have to deal with. Additionally, the supplier takes on a greater responsibility to have the product available when needed, thereby lowering the need for safety safety stock. stock. Also, Also, the suppli supplier er review reviewss the informa informatio tion n on a more more freque frequent nt basis, basis, loweri lowering ng the safety safety stock stock compone component. nt. These These factors factors contrib contribute ute to signifi significant cantly ly lower lower inventories. •
supplier keeps track of inventor inventory y moveme movement nt and takes over Reduced stock-outs : The supplier respons responsibil ibility ity of product product availabi availabilit lity y result resulting ing in a reducti reduction on of stock stock outs, outs, there-b there-by y increasing end-customer satisfaction.
•
Reduced forecasting and purchasing activities : As the supplier does the forecasting and
creating orders orders based on the demand information information sent by the retailer, retailer, the retailer can reduce the costs on forecasting and purchasing activities. •
Increase in sales : Due to less stock out situations, customers will find the right product at
right time. Customers will come to the store again and again, there-by reflecting an increase in sales. Supplier Benefits •
Improved visibility results in better forecasting : Without the VMI process, suppliers do
not exactly know how their customers are going to place orders. To satisfy the demand, suppliers usually have to maintain large amounts of safety stocks. With the VMI process, the retailer sends the POS data directly to the vendor, which improves the visibility and results in better forecasting.
7
•
Reduces PO errors and potential returns : As the supplier forecasts and creates the orders,
mistakes, which could otherwise lead to a return, will come down. •
Improvement in SLA: Vendor can see the potential need for the item before it is actually
ordered ordered and right right product product is suppli supplied ed to retail retailer er at right right time time improv improving ing service service level agreements between retailer and supplier. •
Encourages supply chain cooperation : Partnerships and collaborations are formed that
smooth the supply chain pipeline.
Challenges and Limitations of VMI
The VMI approach has its own set of challenges and limitations: •
Some companies continue to manufacture to stock without leveraging customer specific data effectively for production planning
•
In order order to provide provide priority priority service service to VMI VMI partner partners, s, some some vendors vendors reserve reserve inventor inventory y resulting in shortages to other customers
•
Insufficient level of system integration results in incomplete visibility
•
High expectations from retailers
•
Resist Resistance ance from from sales sales forces forces due to concern concernss of losing losing control control,, effect effecting ing sales sales based based incentive programs
•
Lack of trust and skepticism from employees
Overcoming the Limitations
Effective implementation of VMI depends on smoothly overcoming the limitations and addressing the concerns of various stake holders. Some of the concerns can be addressed as explained below: •
Redefine incentive programs based on partnership building instead of sales volume
•
Build strong partnerships with management commitment to effective communication, active sharing of information, commitments to problem solving and continued support
•
Conduct simulations and pilots before actual implementation
•
Organize training sessions before launching VMI program
•
Set reasonable targets for benefits of VMI
•
Establish agreements on service levels and process to handle exceptions
8
VMI in Retail Supply Chain
Succes Successs in supply supply chain manage managemen mentt usually usually derive derivess from from underst understandi anding ng and managing managing the relationship between inventory cost and the customer service level. The most attractive projects yield improvements along both dimensions, and this is certainly the case with VMI.
Reduced Cost
Demand volatility is the key problem facing most supply chains, eroding both customer service and product revenues. revenues. In traditional retail situations, situations, sales fluctuations fluctuations are made worse by management management policies. policies. Ordering Ordering patterns patterns may be aggravated aggravated by demand uncertainties uncertainties in general, general, conflicting conflicting performance performance measures, measures, planning planning calendars calendars used by buyers, buyers, buyers acting in isolation, isolation, and product shortages that cause order fluctuation. Many suppliers are attracted to VMI because it mitigates uncertainty of demand. Infrequent large orders from consuming organizations force manufactures to maintain surplus capacity or excess finishe finished d goods goods inventor inventory, y, which which are very very expens expensive ive soluti solutions, ons, to ensure ensure respons responsive ive custome customer r service service.. VMI VMI helps helps dampen dampen the peaks peaks and valleys valleys of product production, ion, allowi allowing ng smalle smallerr buffer bufferss of capacity and inventory. Buyers are attracted because VMI resolves the dilemma of conflicting performance measures. Endof-month inventory level for example, is a key performance measure for retail buyers, but customer service level (tracked by some sort of out-of -stock measure) is also applied. These measures are contradictory. Buyers stock up at the beginning of the month to ensure high levels of customer serv servic ice, e, then then let let inve invent ntor ory y drop drop at the the end end of the the mont month h to “mee “meet” t” thei theirr inve invent ntor ory y goal goalss (disregarding the effect on service level measures) The adverse effect is even more pronounced when end-of -quarter incentives are tied to financial reporting. The combined result of this behavior is a monthly order spike to the supplier. With VMI, the frequency of replenishment is usually increased from monthly to weekly (or even daily), which benefits both sides. The supplier sees a much smoother smoother demand signal at the factory. This reduces costs by permitting better resource utilization for production and transportation; it also reduces the need for large buffer stocks. The vendor can make replenishment decisions according to oper operat ating ing needs needs,, and also also has height heightene ened d awar awarene eness ss of trend trendss in dema demand. nd. The The consu consumi ming ng
9
organization benefits from legitimately lower cycle stocks, not just low end-of-month inventories intended to make performance lead the reward system. Even if the buyer has surrendered ownership to the supplier, many benefits benefits arise from improved improved transportati transportation on and warehouse warehouse efficiencies. efficiencies. Moreover, service levels will go up at the end of the month or quarter.
Finally, transportation costs are reduced with VMI. Managed properly, the approach helps increase the percent percentage age of low-cos low-costt full full truckl truckload oad shipme shipments nts and elimin eliminate atess the higherhigher-cost cost less than truckload (LTL) shipments. This is achieved by allowing the supplier to coordinate the re-supply process process instead instead of responding responding automatic automatically ally to orders orders as they are are received. received. Another attract attractive ive option option is more efficient route planning; for example, one dedicated truck can make multiple stops to replenish inventories for several near by customers.
10
Maruti Udyog Ltd.
In 2003, Maruti produced 359,960 vehicles, operating at a capacity utilization of 103%, against the industry average of 57.8%.Vendor management became an important area as Maruti attempted to improve operational efficiency. Maruti procured components worth about Rs.5,000 crores every year. The company's top 10 vendors accounted for about 34 % of its aggregate purchases of components from vendors in India. Marut arutii was worki orking ng on a 3.5% 3.5% per per annu annum m reduction in vendor prices by 2004-2005. Maruti stre stream amlline ined
the
sour sourci cing ng
and
stoc stocki king ng
of
materi materials als and compone components nts throug through h its Deliver Delivery y Instruction system, one of Suzuki's best practices. This his
sys system tem
prov provid ideed
deta detail ilss
of
Marut aruti' i'ss
component requirements for every 15 days, across the different variants of the various models, to its vendors. Web initiatives helped Maruti to bring down procurement time and costs.
Shopper’s Stop
Their Supply Chain Objectives are: •
Customer Objectives
•
Partner Objectives
•
Organization Objectives
The Customer Objectives •
Customer always gets the merchandise of his / her size and choice
•
Merchandise is always presentable and ready befor customer entry
•
Customer easily locates price tags and product information
•
Price on the price tag and Point of Sale System always match
•
Timely replenishment of fast moving merchandise
The Partner Objectives 11
•
Partners always deliver the right quantities as per schedule
•
Partners are always paid as per credit terms
•
Sharing of information with partners related to sales stocks and purchase orders
Organization Objectives •
Customer Response Time
•
Merchandise Availability
•
Distribution Cost
•
Shrinkage
•
Efficiency of executive time
•
Collaboration with Partners
12
The above strategy followed helps Shopper’s Stop to reduce lead time and in achieving following:
Characteristics Characteristics of Retailer-Supplier Retailer-Supplier Partnership Partnership Criteria
Decision Maker
Type Quick Response Continuous
Retailer Contrac Contractual tually ly
replenishment Advanced continuous
to levels Contrac Contractual tually ly
replenishment
to
and
Inventory Ownership
New Skills employed
Retailer agreed agreed Either party
by Vendors Forecasting skills Forecasting and
agreed agreed Either party
inventory control Forecasting
continuous
improved levels Vendor Either party VMI VMI Requirements for Retailer-Supplier Partnership
and
inventory control Retail management
13
•
Advanced Advanced Information Information Systems: This is needed on both the supplier and retailer sides of
the supply chain. Electronic data interchange, EDI or internet based private exchanges- to relay POS information information to the supplier and delivery to the retailerretailer- are essential essential to cut down on data transfer transfer time and entry mistakes. mistakes. Bar coding and scanning are essential essential to maintain maintain data accuracy. Inventory, production control, and planning systems must be on line, accurate and integrated to take advantage of the additional information available. •
Top management commitment: This is important as information that is kept confidential
up to this point will now has to be shared with suppliers suppliers and customers, and cost allocation issues will have to be considered at a very high level. It is also true as such a partnership may shift power within the organization from one group to another. For example, when implementing a VMI partnership the day to day contacts with retailers shift from sales and marketing personnel to logistic personnel. This implies that incentives for and compensation of the sales force have to be modified since retailer’s inventory levels are driven by supply chain needs not by pricing and discount strategies. This change in power may require involvement of top management. •
Partners to develop trust amongst them: Without this the alliance will fail. In VMI for
example, suppliers need to demonstrate that thy can manage the entire supply chain i.e. they can manage not only their own inventory but also that of the retailer. Similarly in quick response confidential information is provided to the supplier, which typically serves many competing retailers. In addition, strategic partnering in many cases results in significant reduction in inventory at the retailer outlet. The supplier needs to make sure that the additional additional available space is not used to benefit the supplier’s supplier’s competitor. competitor. Furthermore, Furthermore, the top management at the supplier must understand that the immediate effect of decreased inventory at the retailer will be a one-time loss in sales revenue.
14
Inventory ownership in Retail-Supplier Partnerships
Invento Inventory ry owners ownership hip issues issues are critical critical to the success success of this this kind of strate strategic gic allianc alliancee effort effort especially one involving VMI. Originally ownership of goods transferred to the retailer when the goods were received. Now, some VMI partnerships are moving to a consignment relationship in which the supplier owns the goods until they are sold. The benefit of this kind of relationship to the retailer is obvious: lower inventory costs. Furthermore since the supplier owns the inventory, it will be more concerned of managing it as effectively as possible. One possible criticism criticism of the original VMI scheme is that the vendor has an incentive to move to the retailer as much inventory as the contract allows. If this is fast moving item and the partners had agreed upon two weeks of inventory, this may be exactly what the retailer wants to see in stock. If however, this is a more comple complex x proble problem m of inventor inventory y managem management ent,, the vendor vendor needs needs to have an incentiv incentivee to keep keep inventories as low as possible, subject to some agreed-upon service levels. For example, Wal-Mart no longer owns the stock for many of the items it carries, including most of its grocery purchases. It only owns then briefly as they are being passed through the checkout scanner. Issues in Retailer-Supplier Partnerships Implementation
For an agreement to be successful, performance measurement criteria must also be agreed to. These criteria should include non financial measures as well as the traditional financial measures. For example, non financial measures could include POS accuracy, inventory accuracy, shipment and delivery accuracy, lead times and customer fill rates. When information is being shared between suppliers and retailers, confidentiality becomes an issue. Specifically a retailer who deals with several suppliers within the same product category may find that the category information is important to the supplier in making accurate forecasts and stocking decisio decisions. ns. Simila Similarly rly,, there there may be a relatio relationshi nship p betwee between n stocking stocking decisions decisions made made by several several suppliers. When entering into any kind of strategic alliance it is important for both the parties to realize that there will be problems that can only be worked out through communication and cooperation. In many cases, the supplier in the partnership commits to fast response to emergencies and situational changes at the retailer. If the manufacturing technology or capacity does not currently exist at the supplier, they may need to be added. 15
Steps in Retailer-Supplier Partnerships Implementation
Following steps are to be followed in VMI implementation 1. Init Initia iall lly y the the contr contrac actu tual al term termss of the the agre agreem ement ent must be negoti negotiat ated. ed. Thes Thesee incl include ude decisions concerning ownership and when it is to be transferred, credit terms, ordering responsibilities, and performance measures such as service or inventory levels, when appropriate 2. Follow Following ing three three tasks tasks must must be be execut executed: ed: •
If they do not exist, integrated information systems must be developed for both supplier and retailer. These information systems must provide easy access to both parties. parties.
•
Effective forecasting techniques to be used by the vendor and the retailer must be developed developed
•
A tactical decision support tool to assist in coordinating inventory management and transpo transporta rtation tion policie policiess must must be develope developed. d. The system systemss develope developed d will will depend on the particular nature of the partnership
16
Advantages of Retailer-Supplier Partnerships
The knowledge the supplier has about order quantities, implying an ability to control the bullwhip bullwhip effect. effect. This though varies from one partnership partnership to other. In quick response response for example, example, this knowledge is achieved through transfer of customer customer demand information information that allo allows ws the supp suppli lier er to reduc reducee lead lead time time,, whil whilee in VMI VMI the reta retaile ilerr prov provide idess dema demand nd information and the supplier makes ordering decisions, thus completely controlling the variability in order quantities. This knowledge can be leveraged to reduce overall system costs and improve overall system service levels.
Better Better service service levels, levels, decreased decreased managerial managerial expenses, and decreased decreased inventory costs for the supplier.
Vendor is able to reduce forecast uncertainties and thus better coordinate production and distribution distribution in terms of reduced safety stocks, stocks, reduced storage, storage, delivery delivery costs and increased service levels
Good opportunity for the reengineering of the retailer-supplier partnership. For example, redundant order entries can be eliminated, manual tasks can be automated and unnecessary control steps can be eliminated from the process
Disadvantages of Retailer-Supplier Partnerships It
is necessary to employ advanced technology, which is often expensive
It
is essential to develop trust in what once may have been an adversarial supplier-retailer
relationship The
supplier often has much more responsibility than retailer. This may force the supplier to
add personnel to meet this responsibility Expenses
at the supplier often increase as managerial responsibilities increase.
Inventory
cost may also increase for the supplier
17
Bibliography •
www.thehindubusinessline.com/praxis/pr0303/03030560.pdf
•
http://www.tezu.ernet.in/dba/Faculty/mrinmoy/retail.pdf
•
http://www.tcs.com/NAndI/default1.aspx?Cat_Id=219&DocType=324&docid=430
•
en.wikipedia.org/wiki/Supply_chain_management
•
•
blonnet.com/pr blonnet.com/praxis/pr axis/pr0303 0303/030 /03030500 30500.pdf .pdf www.i2.com/assets/pdf/PDS_shelf_level_evmi_v61_pds7274_0105.pdf
18
