Outline

Strategic Alliances and Outsourcing

Vendor Managed Inventory 3rd Party Logistics

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Causes of bull-whip Demand Forecast Update Order Batching Price Fluctuation Shortage Gaming

Information sharing
System dynamics POS data

Channel alignment
VMI Discount for information sharing Consumer direct Fixed order schedule

Operational efficiency
Lead-time reduction Echelon-based inventory control

EDI (reduce fixed order cost) Computerassisted ordering EDLP

CRP EDLC Sharing sales, capacity, inventory data Allocation based on past sales

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Supply-chain coordination

Coordination among the supply-chain partners essential to further optimize the supply-chains and reduce costs. As inventory is one of the biggest costs in a supply-chain, it is obvious that the partners should try to synchronize its movement. To reduce (their) supply-chain costs, customers now insist on vendor-managed (or owned) inventory.
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Vendor Managed Inventory: Definition

VMI is the arrangement where continuously and automatically the customers inventory based usage and stock level information the customer.

the vendor replenishes on product supplied by

Inventory can be housed at either the vendors, customers or at a third-party warehouse. Vendor is now responsible for replenishing the inventory. Customer withdraws the inventory as and when the need arises.

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Vendor Managed Inventory (VMI)

Practiced in retailing, food distribution and FMCG. Vendor is responsible for decisions concerning replenishment of inventory at the buyers premises. Buyer still holds the inventory and incurs the related cost. Under the Supplier-Owned Inventory (SOI) arrangement, the supplier owns and manages the inventory at the buyers premises and therefore incurs the related cost.

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SOI: the process flow

Bu yer t rig ger Pu ll R eq u es t to 3PL h ub

Step 3

Buyer

3PL
Step 4
3P L s ubmits daily & mo nthly inv entory repor t to the S upplier for each P ull v ia email

Step 5
S up plier will activate rep lenis hm en t on ce q ua ntities in th e Hu b fall b elo w R e-order po in t S up plier con firms ord er w ith s up ply plan & p la ces in tercomp an y o rder & d ro p-s hip t o 3 PL h u b ba sed on a greed sa fety sto ck lev el

Bu yer w ill p rovide 6 moth s rollin forecas t 3 m ont hs b lank et P/Os an d also m ont hly forecas t o f each Part t o t he Su pp lier

Step 1 Step 2

Step 6
S up plier is su se co mmercial in voices b ased o n Pull req ues t via P/Os #

Supplier
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VMI: Set-Up Considerations

Communication Mechanism Inventory Carrying Costs Transportation Costs Transaction and Information Costs

Cost-Benefits Analysis

Supplier Agreement (Legal) Selection of 3rd Party Logistics Provider Capacity Financial Strength Location and Proximity
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VMI: Benefits and Drawbacks

Customer
More control on Supply (higher availability, predictable results) Admin simplification (Re-focus of customer resources) * Lower inventory * Lower obsolescence costs * Develops partnership

Supplier
* Control on Demand (better predictability, lower swings) * More efficient use of internal resources * Improve service level to customer * Tie customer to supplier (Improves Customer Loyalty, higher entry barrier for competitors)

Drawbacks

Benefits

* Higher freight cost (If inventory at 3PL * Higher inventory level (Safety stock). warehouse, and buyer paying)

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