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RETAILER SUPPLIER PARTNERSHIPSSUPPLY CHAIN MANAGEMENT AND LOGISTICS
CONTENTS
Introduction 3
Types of Strategic Alliances 4
Retailer-Supplier 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 Partnership 13
Requirements for Retailer-Supplier Partnership 14
Inventory ownership in Retail-Supplier Partnerships 15
Issues in Retailer-Supplier Partnerships Implementation 15
Steps in 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. Supply chain management spans all movement and storage of raw materials, work-in-
process 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 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
5
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.
Benefits of VMI Process
6
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.
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.
7
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
VMI in Retail Supply Chain
8
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.
End-of-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 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
9
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
11
The Partner Objectives
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
Decision Maker Inventory
Ownership
New Skills employed
by Vendors
Quick Response Retailer Retailer Forecasting skills
Continuous
replenishment
Contractually agreed
to levels
Either party Forecasting and
inventory control
Advanced
continuous
replenishment
Contractually agreed
to and continuous
improved levels
Either party Forecasting and
inventory control
VMI Vendor Either party Retail management
13
Requirements for Retailer-Supplier Partnership
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
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