Strategic Partnering:

Types of SP
Quick Response:
Vendors receive POS data from retailers, and use
this information to synchronize production and
inventory activities at the supplier.
The retailer still prepares individual orders, but the
POS data is used by the supplier to improve
forecasting and scheduling.
Example: Milliken and Company: The lead time
from order receipt at Millikens textile plants to final
clothing receipt at several of the department stores
involved was reduced from eighteen weeks down to
three weeks.
 Strategic Partnering:
Types of SP
Continuous Replenishment: Vendors receive
POS data and use it to prepare shipments at
previously agreed upon intervals to maintain
agreed to levels of inventory.
Wal-Mart, Kmart
Advanced Continuous Replenishment:
Suppliers may gradually decrease inventory
levels at the retailers store or distribution
center as long as service levels are met.
Inventory levels are thus continuously
improved in a structured way.
Kmart
 Strategic Partnering:
Types of SP
Vendor Managed Inventory
(VMI):JITD
VMI Projects at Dillard Department
Stores, J.C. Penney, and Wal-Mart have
shown sales increases of 20 to 25
percent, and 30 percent inventory
turnover improvements.
 Advantages of SP
Decrease required inventory
levels
Improve service levels
Decrease work duplication
Improve forecasts
 Advantages of SP
Fully utilize system knowledge
Consider the partnership between White-
Hall Robbins (W-R), who makes over-
the-counter drugs such as Advil, and
Kmart. W-R initially disagreed with
Kmart about forecasts, and in this case,
it turned out that W-R forecasts were
more accurate because they have a
much more extensive knowledge of their
products than Kmart does.
 Disadvantages of SP
Expensive advanced technology is
required.
Supplier/retailer trust must be
developed.
Supplier responsibility increases.
Expenses at the supplier often
increase.
Why? How can this be addressed?
 Conceptual Evolution of
Inventory Management

Owner Managed Continuous Consignment

Inventory Replenishment
VMI Selling
Direct Selling
 Vendor Managed Inventory
(VMI)
VMI is essentially an integrated
approach whereby the inventory
at the distributor/retailer
(downstream) is monitored and
managed by the
manufacturer/vendor (upstream)
 VMI rationale .
By pushing the decision making
responsibility further up the supply
chain, the manufacturer/vendor will be
in a better position to support the
objectives of the entire integrated
supply chain resulting in sustainable
competitive advantage
 VMI includes
Determining appropriate order
quantities
Managing proper product mixes
Configuring appropriate safety stock
 Typical Benefits to
Manufacturers
Lower inventory investments (raw
and finished)
Better scheduling and planning
Better market information
Closer customer ties and preferred
status
Typical Benefits to Retailers
Fewer stock-out with higher
inventory turnover
Better market information
More optimal product mix
Less inventory in channels (transfer
costs)
Lower administrative replenishment
costs
 VMI Success Factors
Top management commitment
Focus on effort
Trust and partnership between supply
chain stakeholders
Highly effective computer/information
systems (EDI, Bar coding, Scanning)
Competent manufacturers and the ability
to forecast
Willing stakeholders partners and patience
 Electronic Data
Interchange EDI
computer to computer
exchange of business
transaction in a standard
format
 EDI Benefits
Quick access to information
Reduced labor and material costs
associated with handling paper-based
business transaction
Better communication
Increases productivity
Improved tracing and expediting
Improved billing
Better customer service
 Ownership of inventory
Initially, ownership transferred to retailer upon
receipt of goods
Now, VMI is based on consignment
relationship in which manufacturer owns
goods until sold

Retailer benefit: lower inventory cost

Manufacturers benefits: better control
Supply chain benefit: system-wide cost
reduction
 Requirements for Effective SP
Advanced information systems
Top management commitment
Information must be shared
Power and responsibility within an organization
might change (for example, contact with customers
switches from sales and marketing to logistics)
Mutual trust
Information sharing
Management of the entire supply chain
Initial loss of revenues
 Important SP Issues
Inventory ownership:
Retailer owns inventory
Supplier owns the goods until they are
sold (consignment)
Why would a firm do this?
Performance measures: Fill rate,
inventory level, inventory turns
 Important SP Issues
Confidentiality
Communication and cooperation
When First Brands started partnering with
Kmart, Kmart often claimed that its
supplier was not living up to its agreement
to keep two weeks of inventory at all
times. It turned out that this was due to
the fact that the two companies employed
different forecasting methods.
Steps in SP Implementation
Contractual negotiations
Ownership
Credit terms
Ordering decisions
Performance measures
Develop or integrate information systems
Develop effective forecasting techniques
Develop a tactical decision support tool to
assist in coordinating inventory
management and transportation policies
 Main Characteristics of SP

Criteria Decision Inventory New Skills

Types Maker Ownership Employed by vendors
Quick Retailer Retailer Forecasting Skills
Response
Continuous Contractually Agreed Either Forecasting &
Replenishment to Levels Party Inventory Control
Advanced Contractually agreed Either Forecasting &
Continuous to & Continuously Party Inventory Control
Replenishment Improved Levels
VMI Vendor Either Retail
Party Management
 Examples of SP Successes
and Failures
Western Publishing-Golden Books:
Western Publishing is using VMI for its Golden Books line
of childrens books at several retailers.
POS data automatically triggers re-orders when
inventory falls below a reorder point.
This inventory is delivered either to a distribution center,
or in many cases, directly to the store.
Ownership of the books shifts to the retailer once
deliveries have been made.
In the case of Toys R Us, the company has even
managed the entire book section for the retailer,
including inventory from suppliers other than Western
Publishing.
Extra sales, increased costs to Western
 Examples of SP Successes
and Failures
VF Corporations Market Response System:
The VF Corporation, which has many well known
brand names (including Wrangler, Lee, Girbaud,
and many others), began its VMI program in 1989.
Currently, about 40 percent of its production is
handled using some type of automatic
replenishment scheme.
This is particularly notable because the program
encompasses 350 different retailers, 40,000 store
locations, and more than 15 million replenishment
levels.
VFs program is considered one of the most
successful in the apparel industry.
 Examples of SP Successes
and Failures
Spartan Stores
Spartan Stores, a grocery chain, shut down its
VMI effort about one year after its inception.
One problem was that buyers were not
spending any less time on reorders than they
did before
This was because they didnt trust the
suppliers enough to be able to stop carefully
monitoring the inventories and deliveries of
the VMI items, and intervening at the slightest
hint of trouble.
 Examples of SP Successes
and Failures
Spartan Stores (continued)
Suppliers didnt do much to allay these
fears. The problems were not with the
suppliers forecasts; instead, they were
due to the suppliers inability to deal with
promotions, which are a key part of the
grocery business.
Since they were unable to appropriately
account for promotions, delivery levels
were often unacceptably low during these
periods of peak demand.
 Distributor Integration
Parts are shared across the distributor network
Specialized service requests are steered to
appropriate dealers or distributors.
What is required?
Trust
Pledges
Guarantees from the manufacturer
Advanced information systems
Disadvantages
Incentives for dealers are they giving away competitive
advantages?
Skills and responsibilities are taken from some
dealers/distributors.
Examples - Caterpillar, Okuma