Retailer Supplier Partnerships

RETAILER SUPPLIER PARTNERSHIPSSUPPLY CHAIN MANAGEMENT AND LOGISTICS CONTENTS Introduction Types of Strategic Alliances Retailer-Supplier Partnerships(RSP) Types of RSP VMI Advantages Challenges Indian Examples: Maruti and Shopper’s Stop Characteristics of Retailer-Supplier Partnership Requirements for Retailer-Supplier Partnership Inventory ownership in Retail-Supplier Partnerships Issues in Retailer-Supplier Partnerships Implementation Steps in Retailer-Supplier Partnerships Implementation Advantages of Retailer-Supplier Partnerships Disadvantages of Retailer-Supplier Partnerships Bibliography 3 4 5 5 5 7 8 11 13 14 15 15 16 17 17 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. Supply chain management spans all movement and storage of raw materials, work-inprocess inventory, and finished goods from point-of-origin to point-of-consumption. 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 sourcing, procurement, conversion, and logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, 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 are a number of strategic alliances amongst the above mentioned players. A Strategic 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 capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic 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 for their products and services or new products for their 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.  Retailer-Supplier Partnerships: It’s the formation of strategic alliances between the retailers and their suppliers.  Distributor 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: Here suppliers receive Point of Sale (POS) date 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 to improve forecasting and 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 POS data. Additionally, this type of partnership could be preferred if financial and personnel resources to develop a more integrated relationship are not 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 intervals to maintain specific levels of inventory. In an advanced form of continuous replenishment, suppliers may gradually decrease inventory levels at the retail store or distribution center as long as the service levels are met. Thus, in a 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 quick response and VMI, because suppliers and buyers together agree on target inventory and 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. • Vendor-Managed Inventory (VMI) System: This is also called vendor-managed 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 overall system savings than the other two types of partnerships. However, VMI requires more commitment, and initially, significant investment in information 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 stock. Also, the supplier reviews the information on a more frequent basis, lowering the safety stock component. These factors contribute to significantly lower inventories. • Reduced stock-outs: The supplier keeps track of inventory movement and takes over responsibility of product availability resulting in a reduction of stock outs, there-by increasing end-customer satisfaction. • Reduced forecasting and purchasing activities: As the supplier does the forecasting and creating orders based on the demand information sent by the 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 and right product is supplied to retailer at right time improving 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 to provide priority service to VMI partners, some vendors reserve inventory resulting in shortages to other customers Insufficient level of system integration results in incomplete visibility High expectations from retailers Resistance from sales forces due to concerns of losing control, effecting sales 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 Success in supply chain management usually derives from understanding and 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. In traditional retail situations, sales fluctuations are made worse by management policies. Ordering patterns may be aggravated by demand uncertainties in general, conflicting performance measures, planning calendars used by buyers, buyers acting in 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 finished goods inventory, which are very expensive solutions, to ensure responsive customer service. VMI helps dampen the peaks and valleys of production, allowing smaller buffers 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 service, then let inventory drop at the end of the month to “meet” their inventory goals (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 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 operating needs, and also has heightened awareness of trends in demand. The consuming 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 arise from improved transportation and warehouse 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 percentage of low-cost full truckload shipments and eliminates the higher-cost less than truckload (LTL) shipments. This is achieved by allowing the supplier to coordinate the re-supply process instead of responding automatically to orders as they are received. Another attractive 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. Maruti was working on a 3.5% per annum reduction in vendor prices by 2004-2005. Maruti streamlined the sourcing and stocking of materials and components through its Delivery Instruction system, one of Suzuki's best practices. This system provided details of Maruti's 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 of Retailer-Supplier Partnership Criteria Type Quick Response Continuous Decision Maker Retailer Contractually Inventory Ownership New Skills employed by Vendors Forecasting skills Forecasting and inventory control Forecasting and inventory control Retail management Retailer agreed Either party agreed Either party replenishment to levels Advanced continuous Contractually replenishment to and continuous improved levels VMI Vendor Either party Requirements for Retailer-Supplier Partnership 13 • Advanced 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 to the supplier and delivery to the retailer- are essential to cut down on data transfer time and entry mistakes. Bar coding and scanning are essential to 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 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 available space is not used to benefit the supplier’s competitor. 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 Inventory ownership issues are critical to the success of this kind of strategic alliance 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 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 complex problem of inventory management, the vendor needs to have an incentive to 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 decisions. Similarly, there may be a relationship between stocking decisions made by 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. Initially the contractual terms of the agreement must be negotiated. These include 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. Following three tasks must be executed: • 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. • Effective forecasting techniques to be used by the vendor and the retailer must be developed • A tactical decision support tool to assist in coordinating inventory management and transportation policies must be developed. The systems developed 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 effect. This though varies from one partnership to other. In quick response for example, this knowledge is achieved through transfer of customer demand information that allows the supplier to reduce lead time, while in VMI the retailer provides demand 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 service levels, decreased managerial expenses, and decreased inventory costs for the supplier.  Vendor is able to reduce forecast uncertainties and thus better coordinate production and distribution in terms of reduced safety stocks, reduced storage, 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/praxis/pr0303/03030500.pdf www.i2.com/assets/pdf/PDS_shelf_level_evmi_v61_pds7274_0105.pdf • 18