The ins and outs of VMI
Vendor-managed inventory (VMI) is old hat at home improvement retailer Ace Hardware Corp. Since 1987, about 20 manufacturers have been receiving electronic data interchange (EDI) transactions from Ace, converting the messages to purchase orders and shipping goods. In 1999, Ace upped the ante and began using collaborative planning, forecasting and replenishment (CPFR) software from JDA Software Group Inc.
“Last year, we shipped $475 million in product to retail stores on this model, and we expect to push it to $600 million in 2004, approximately a quarter of our sales,” says Scott Smith, department manager — inventory with Ace Hardware.
At Limited Logistics Services, VMI is a hot issue. Nick LaHowchic, president and CEO of the wholly owned subsidiary of apparel maker Limited Brands, uses VMI to manage reduction in stock on hand and speed new products to market.
“We are not mass merchandisers,” LaHowchic states. “We depend on newness. We need to get out of things quickly and into new things quickly. We need to be out there first and react to what the customer wants.”
VMI is just beginning to make inroads in the frozen food sector of the grocery industry. Rod Christie, director of customer logistics with Rich Products, reports having some success in his push to get wholesalers and retailers to see VMI as a value-added service.
“We’re still early in the process, primarily doing VMI for wholesale distributors who service retailers,” Christie says.
While there’s no sense of urgency from Rich Products’ customer base asking them to implement VMI, Christie sees more people at least talking about it. He believes, through VMI, Rich Products can provide better service to customers through improved visibility of both inventory and forecast information at the customer end.
“We can respond proactively and do a better job of planning our inventory requirements to support their needs,” he adds.
On the supplier side, Brown-Forman Corp. is operating successfully with VMI in multiple sectors. “Our bottle supplier manages our inventory of glass,” says James Hutchinson, senior vice president, supply chain integration with the maker of Jack Daniels and other spirits. “They keep it in a local warehouse. We call daily with our order for the next day.”
Hutchinson’s team has the visibility they need to this critical product. “We have web access to the glass supplier’s inventory at the warehouse and plant and to their production schedule. Since we single-source glass products, we only have to tap into one system, so it’s like having them on our own system,” he notes.
Brown-Forman’s cash flow benefits since the glass supplier holds inventory on consignment. The spirits producer pays for standard glass products when it uses them. Because it’s so critical to their operation, Hutchinson notes, they tend to double check the supplier’s data, eliminating any potential manpower savings.
Hutchinson’s team updates its six-month forecast each month.
“On A and B SKUs, those monthly forecasts are approximately 75% accurate — pretty good for the industry,” he claims. “The further you are from the retailer, the more volatile your demand.”
Brown-Forman also uses VMI with a finished goods supplier. Glenmorangie, a producer of malt scotch whisky, recognizes it doesn’t make sense for them to duplicate Brown-Forman’s distribution capability in smaller markets.
While Glenmorangie manages its inventory of whisky, Brown-Forman actually physically handles the inventory in the U.S. When a retailer needs Glenmorangie whisky, it’s added to a load of Brown-Forman product to achieve a full truckload delivery. Since Glenmorangie has visibility into inventory levels in the U.S., it can manage its overall production schedule. “They see both our orders and our forecasts,” adds Hutchinson.
This kind of visibility and communication is a key component of VMI. Limited Brands receives daily information on transactions in the store.
“We have great depth in what’s selling in the store — when, by the hour and a daily inventory position,” states LaHowchic. The retailer compiles that information into a weekly report for its manufacturers but also passes along any exceptions as they occur.
At Rich Products, Christie depends on a third party, IBM Corp., for the electronic exchange of such timely information.
“They do the setup on a fee-for-service arrangement,” Christie explains. “For us, using a third party has an advantage beyond capital investment avoidance. The third party does the same thing for many manufacturers. There’s a good chance they already know our customer. And, because of their experience, setup is much easier.”
Rich Products’ customers communicate all withdrawals, inventory balances and open purchase orders to IBM on a daily basis. Christie’s team reviews this activity daily to establish the replenishment order for the customer. “We base replenishment orders on agreed-to inventory and service performance guidelines, and we work toward meeting and exceeding customer requirements,” he notes.
“We look at the customer’s system daily to see need,” Christie adds. “Using a customer purchase order, we build an order and send it through the customer’s purchasing system. It’s sent back to us electronically as a valid order. They might give us purchase orders in a block or a number of individual purchase orders daily.”
The customer owns the inventory in their warehouse, but Rich Products manages it, Christie points out. “We know the customer’s expectations. We’re helping them manage their inventory balances and capital invested in inventory.”
When it comes to managing inventory, LaHowchic’s team looks for atypical solutions, especially as they fine-tune VMI for Limited Brands’ Bath & Body Works and Victoria’s Secret personal product lines. He views VMI as a tool to shift inventory back through the supply chain.
“We think about how we can bypass steps or change our manufacturing strategy, possibly deploying straight from factory to store,” LaHowchic notes. “The factory — a contract manufacturer — holds our buffer inventory, typically a 15- to 30-day supply.”
Inventory held by manufacturers and their suppliers may be far from finished. LaHowchic uses postponement as an important element of VMI and is testing how far he can push inventory back through the supply chain. On the personal-products side, Limited Brands looks at bases and common components. In apparel, the retailer may commit to uncolored fabric or colored fabric that’s not cut.
“We can pre-position it in the supply chain and decide later on type of garment or fashion details,” LaHowchic says. For instance, a typical bra has 27 components. “We ask which can be common to new products,” he explains.
In 1999, Ace Hardware migrated to a product that offers even more advantages than VMI. “Under traditional VMI, Ace as the customer didn’t see any background information,” notes Smith. “With CPFR, we and the supplier look at the same data and we both have input into the process. The ability to see was critical. It’s easier to have intelligent input when you can see what’s happening.”
The move to CPFR brought new rules and greater expectations. If suppliers want to be able to dial in and cut a purchase order, they have to agree to a higher level of performance and attend a one-week training program, notes Smith.
“We walk the manufacturers through the process so they learn how we both benefit,” Smith explains. “While one objective is to lower supply chain costs, our ultimate goal is to have product on the floor for the customer, not just complete shipments to Ace Hardware. If there is a stock-out, studies show the retailer loses the sale 60% of the time while the manufacturer loses it only 48% of the time. So it’s not enough to know the reason for a stock-out. Don’t be out of stock in the first place.”
To facilitate better performance, Ace communicates with suppliers through the web and phone calls. However, the most important communication comes at the beginning of the program, asserts Smith. The training program includes inventory management theory and a look at issues such as seasonality, forecasting and fill rate at retail.
“Suppliers are tested at the end of the training program to see how much information they retained, and to show us which manufacturers we need to work with a little more,” he notes.
“We have several success stories,” Smith continues. “For example, a small manufacturer grew from $2 million in sales to Ace in 1999 to $7 million in 2003. While part of the growth was from better fill rates, by far the majority was because they operated more efficiently in the supply chain than their competition at Ace, so it was a no-brainer to increase their volume.”
Similarly, LaHowchic’s team at Limited has worked at building these types of win/win relationships with his VMI partners. His payoff is improved reliability and service as well as reduced investment. But the suppliers gain as well.
“VMI offers higher continuity in how suppliers manage the supply chain,” LaHowchic says, “and it gives them more insight into customer likes and dislikes. They are more aware of consumption.”
Logistics professionals ultimately must choose the right program for their industry segment, but they also need to be aware of constantly changing conditions and remain open to new opportunities. LT
JDA Software Group Inc.
Limited Logistics Services
Rich Products Corp.
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VMI, in 50 words or less
Vendor-managed inventory (VMI) is the practice of retailers making suppliers responsible for determining order size and timing, usually based on receipt of retail point-of-sale and inventory data. Its goal is to increase retail inventory turns and reduce stock outs.
— Kate Vitasek, Supply Chain Visions