Enhancing Business Performance via Vendor Managed Inventory Applications

Modern Information and Communications Technologies (ICTs) connect companies in new and novel ways and, as a result, allow them to develop new competencies for competing successfully. ICTs make it possible for companies to collaborate on the design of new products and services, configure new sales and distribution channels, and efficiently replenish those channels to reduce costs and maintain high levels of customer service. The growing electronic interconnectedness of modern companies suggests that a company’s competitive success depends, to a large extent, on its entire supply chain—rather than on just itself—and the ability of the supply chain to deliver products quickly, reliably, and inexpensively to each supply chain participant, including end consumers.

With the emergence of Web services, service-oriented architectures, and new, powerful, commercially-available supply chain applications, the notion of supply chain improvement can take on multiple meanings.^a To narrow the scope of inquiry, we focus on interorganizational Vendor Managed Inventory (VMI) applications. VMI applications offer a means to improve inventory management and the order fulfillment process. With VMI applications, given customer demand, on-hand stock levels, and other data and information, suppliers (or vendors) can automatically replenish a trading partner’s inventory without the need for approved purchase orders. VMI applications can connect companies via one database and/or network and, as a result, provide several important supply chain competencies, namely electronic integration of supply chain data, information, and computer-based business systems; real-time access to and use of specific supply chain data and information (even knowledge) at multiple locations; sufficient information for high-velocity decision-making; and increased visibility^b of business events, materials, and products/services. In line with CEO, CIO, and supply chain executives’ concerns, we concentrate on VMI application benefits (for example, reduced supply chain costs), VMI application-enabled competencies^c (for example, access to supply chain data and information) that are positively related to those benefits, and implementation elements (for example, business process redesign) that affect those competencies, as determined by one Web-based VMI application, which we describe below. The application links separate companies and their facilities through a common database and network.^d Thus, we are not able to make statements about issues experienced by users of other proprietary and commercially-available VMI applications.^e

As we demonstrate here, VMI applications can provide several important competencies that beget important business benefits, including improved competitive and financial position or at least the background music for it. Yet, how should companies go about attaining these competencies and benefits? Do companies need a strategic imperative (for example, The competition is ahead!) to deploy a VMI application? Should companies mandate VMI deployment rather than build mutually beneficial relationships with their suppliers and/or customers?^f What constitutes best practice? Using data collected from chemical and plastics manufacturing facilities that employ one Web-based VMI application, we answer these (and other) important questions and provide insight into successfully implementation of VMI applications and the attainment of important business benefits.

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The Context and VMI Application

GE Operations Services Global Vendor Managed Inventory (Global VMI)^g is a Web-based service that is used by chemical and plastics companies belonging to Fortune’s top-10 list.^h Global VMI employs electronic sensors to measure raw material inventories at Six Sigma quality levels; connects facilities through its Web-based communications architecture; and via its centralized database and browser-based interface provides a number of valuable competencies (for example, full supply chain visibility).

For example, order-fulfillment users at supplier locations and purchasing users at customer locations can view actual demand, or draw down, at all silos and inventory locations; consumption forecasts and on-hand balances; and shipments in progress. Users can even receive alerts if inventory exceeds predetermined levels and download all data into their ERP applications. Because of its integrated architecture, Global VMI permits, if authorized by suppliers/customers, access to inventory information at upstream and downstream locations. Global VMI’s functionality provides almost unprecedented connectivity and supply chain visibility.

Global VMI is different from Enterprise Resource Planning (ERP) and Collaborative Planning, Forecasting, and Replenishment (CPFR) applications. ERP applications are expansive, including a number of business processes (for example, accounts receivable, purchasing, and customer service). CPFR is a multi-step process for a supplier and a customer to develop formal policies and procedures that build consensus sales forecasts, establish replenishment plans,² and manage structured workflows.⁶ Global VMI can be used in place of CPFR and some companies are using its functionality alone to make replenishment decisions. Alternatively, a few companies use Global VMI to supplement CPFR data points because Global VMI provides real-time, Six Sigma data feeds about inventory levels at any location in a supply chain.ⁱ Global VMI is much less expansive in scope than ERP, requires less instrumentation to collect data than ERP and CPFR, and doesn’t require extensive organizational change as does ERP and CPFR. As a result, Global VMI is easy to install and implement in a company, making it a benign, yet extremely powerful, connectivity tool.

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Respondents

To gain a better understanding of VMI applications, their benefits, and potential enablers, 89 Global VMI users completed a Web-based questionnaire^j. The largest percentage (27%) of respondents is from sales, customer service, and order fulfillment (see Table 1). Non-managers outnumber managers two to one. Two-thirds of the facilities are large, with sales of over $500 million. Just over half of the facilities are positioned at the beginning of the supply chain. A third of the facilities are connected via Global VMI with at least 10% of their direct suppliers/customers, and 41% are managing at least 11% of their materials through Global VMI. A little over a third (36%) of the facilities are connected to just one supplier/customer, while 11% of the facilities are connected to six or more suppliers/customers. Over 90% of all respondents have been using Global VMI for at least six months. There is no systematic difference between respondents from the sell- (supplier) and buy-side (customer) of a business; consequently, the following results reflect their combined perspectives.

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VMI Application-enabled Competencies and Associated Business Benefits

VMI applications can provide several important competencies and the level of competency varies across the respondents’ companies. We focus on the following VMI application-enabled competencies:

• Adequate information about suppliers/customers
• Access to inventory data at a supplier’s/customer’s location
• Use of Global VMI to obtain more supply chain visibility
• Integration of Global VMI inventory data with a facility’s systems
• Access to inventory data at upstream and downstream locations

A majority of companies (53%) have immediate access to data at suppliers’/customers’ locations and 67% have adequate information about their suppliers/customers (see Figure 1). Interestingly, although Global VMI is capable of linking companies in any arrangement, most companies prefer to implement just a dyadic connection at this time, limiting visibility to just their immediate suppliers/customers. As expected, suppliers were more apt to have access to data and information at downstream locations than customers at upstream locations. This is primarily due to the fact that customers ultimately determine suppliers’ downstream demand and, with knowledge of downstream demand, upstream suppliers can reduce the bullwhip effect, or extreme variability in ordering and inventory levels.^k Only 28% of the companies have integrated Global VMI inventory data with their business systems, missing the opportunity to amalgamate important data and to develop a more complete picture of how supply chain activities impact their businesses.

As a group, the Global VMI competencies are moderately to highly correlated with all business benefits considered.^l Companies that established these competencies receive numerous business benefits (see Figure 1). For example, 72% of the companies have more efficient planning and replenishment practices, 71% have streamlined their replenishment processes, and 69% have developed an improved relationship with their suppliers/customers. Even the companies that have access to upstream and downstream inventory information via Global VMI are streamlining their purchasing processes, possibly beyond their immediate suppliers/customer; increasing their sales; and aligning, more effectively, resources with manufacturing demand.

Clearly, a VMI application that provides the above competencies is capable of moving a supply chain to the next level: companies that develop mutually beneficial competencies with their suppliers/customers—via a VMI application—and that leverage those competencies earn a number of important business benefits.

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Impediments to VMI Applications

Oddly, a few of the companies encounter problems, which may impede their VMI initiatives. Less than a third (30%) of the companies consider their inability to change established business practices as an important impediment. One out of five companies feels that technical (20%) and functional area (20%) issues prevent them from fully leveraging Global VMI information with other business activities. Even though lack of trust among supply chain participants is not a major issue, it is more of a concern for suppliers than for customers, suggesting that suppliers may be more skeptical than customers of supplier-customer relationships. The apparent lack of serious impediments may be due to the fact that Global VMI is less intrusive from a technological and organization change perspective than, say an ERP system, which can involve multiple internal business processes and functions.

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Enabling Elements of VMI Initiatives and Emerging Best Practices

We identify three primary dimensions of implementation elements that affect VMI applications. Companies can positively affect the attainment of VMI-enabled competencies and benefits through these implementation elements (see Figure 2).

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Information Technology

A company’s ability to successfully implement VMI is a direct function of its IT. To make progress, it is critical that a company consider a VMI application as an enabler and use it to provide visibility and real-time integration of supply chain business processes. Consequently, the following four implementation elements constitute the IT dimension:

• Global VMI as a tool for effective supply chain management
• Sole use of Global VMI for replenishment decisions
• Investment in IT to enable supply chain visibility
• Use of Global VMI for real-time supply chain integration

Although practice varies among the companies, an overwhelming number of companies (87%) indicate that Global VMI is a tool for effective supply chain management and 60% actually use just Global VMI for making replenishment decisions (see Figure 3).

As a group, the four IT implementation elements are moderately to highly correlated with all the relevant competencies and business benefits. Clearly, a VMI application that supports enhanced visibility and real-time integration of supply chain activities across multiple companies increases a company’s supply chain competencies and directly, as well as indirectly, produces a number of valuable business benefits. Although only 40% of companies use Global VMI for real-time integration of supply chain activities, many more would have benefited if they had followed this practice.

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Process Redesign

Many companies have found that they need to modify their business processes to get the most out of their IT investments.¹ Companies that are using VMI applications should align their supply chain processes in order to synchronize activities and identify the affiliated data and information that needs to be exchanged.^m Generally, companies change employees’ roles and responsibilities to be congruent with the new supply chain process(es)³. Consequently, the following four implementation elements comprise the redesign dimension:

• Changes in roles and responsibilities of personnel due to Global VMI implementation
• Investment in redesigning the supply chain to link more effectively with suppliers/customers
• Modification of supply chain activities during Global VMI implementation
• Subsequent modification of supply chain activities (such as, some time after Global VMI implementation)

A large percentage of companies (66%) redesigned their purchasing and order fulfillment processes with about two-thirds (40%/66%) preferring to do it at the same time as the Global VMI implementation (see Figure 3). Moreover, 64% of the companies changed the roles and responsibilities of buying and selling personnel as they deployed Global VMI.

As a group, these process redesign elements are moderately to highly correlated with all connectivity measures and with all business benefits. Process redesign is so extensive that 63% of the companies instituted an aggressive VMI program, where the suppliers fully manage their customers’ raw material inventory. Some 58% of the companies manage their raw material inventory, but allow their suppliers to view raw material balances and utilization. These results imply sharing material management roles and responsibilities and a clear move from the previous archaic practice of having customers in charge of materials management and purchasing-related activities. Also, a full VMI program is correlated with three of five VMI application-enabled competencies and almost all of the benefit items.ⁿ This suggests that companies should implement a VMI program via Global VMI—or some other software application – to attain business benefits.^o

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Organizational Support

There are three types of organizational support implementation elements: strategic imperative, management and organizational support, and supplier-customer relationship.^p Strategic imperative provides the motivation, or logic, to move forward with VMI applications. Management and organizational support are important to successfully undertake any IT initiative⁴ – maybe more so for VMI applications because of their interorganizational character. Finally, there needs to be a positive relationship between suppliers and customers⁵ to ensure that companies develop and maintain an environment that allows VMI competencies to emerge and flourish.

Concerning strategic imperative, we use the following two elements:

• Optimization of supply chain performance
• Achievement of a competitive advantage

A large majority (87%) of companies implement Global VMI to optimize supply chain performance (see Figure 3). Suppliers are more apt to pursue connectivity initiatives than their customers to gain an advantage over competitors. Only 7% of the companies have Global VMI because their competitors have it. Thus, companies that have installed Global VMI are acting strategically and preemptively to improve their supply chains and to distance themselves from their competitors.^q

As a group, there is little correlation between the above strategic imperative elements and the relevant competencies. The supply chain optimization imperative is correlated with adequate information about suppliers/customers and increased supply chain visibility, while achieving competitive advantage over suppliers/customers is correlated with increased supply chain visibility and effective supply chain management. However, the strategic imperative elements are correlated with all of the benefit elements. Thus, from a strategic perspective, companies see Global VMI less as a supply chain tool than as a means to improve supply chain performance and attain business benefits. In fact, they may not even think of VMI applications as having strategic importance vis-à-vis their supply chains, which are clearly strategic in the companies’ minds. This is not surprising because the relationship between VMI applications and business benefits has not been established – as this report does – as completely as the link between other management initiatives (for example, business process reengineering) and business benefits.

With regard to management and organizational support, we include the following three implementation elements:

• Purchasing (or sales) organization’s support for Global VMI
• Top management’s support for Global VMI’s approach to supply chain management
• IT organization’s support for Global VMI

Most companies (75%) have the support of senior management and the support of the functional areas affected by Global VMI (see Figure 3). These management and organizational support elements are moderately to highly correlated with all competencies – except access to inventory data at upstream and downstream locations—and all business benefits. Clearly, high levels of management and organizational support beget sought after competencies and lead to business benefits. As with many business and IT projects, senior managers and functional area managers need to support VMI applications if they are to work as expected and result in positive outcomes.

Finally, concerning the supplier-customer relationship, we use the follow five implementation elements:

• Formation of a supplier-customer relationship to satisfy mutual needs
• Suppliers and customers jointly determine supply chain roles, responsibilities, and activities
• Suppliers and customers negotiate service levels and raw material inventory targets
• Use of a cross-organizational team to manage the Global VMI replenishment process
• Suppliers and customers cross invest on major projects

Through these activities, companies attempt to build, nurture, and maintain strong relationships with their supply chain partners.

Excluding cross investing on major projects, a majority (at least 66%) of companies attempt to build working relationships with suppliers/customers (see Figure 3). Moreover, almost 100% of the companies consider their supplier/customer relationships to be extremely important and have a long-term relationship with their suppliers/customers.

As a group, the supplier-customer relationship elements are moderately to highly correlated with all competencies and business benefits, suggesting that congruous relationships among supply chain partners and the active maintenance of those relationships are extremely important to successful VMI implementations. To improve a supply chain via a VMI application, in an inter-company team environment, suppliers/customers must grapple with organizational issues, including new roles, responsibilities, and activities of key personnel, and actively manage the routine inter-organizational aspects of the replenishment process. Interestingly, a little less than 25% of the companies have their suppliers/customers mandate the use of Global VMI as part of a purchasing agreement. These findings suggest that companies cannot mandate the formation of relationships and the adoption of VMI applications in contracts rather they need to build trust via joint investments and mutually beneficial cross-company arrangements to grow positive relationships and promote increased connectivity.^r,s

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Management Directives

As empirically demonstrated here, companies – including suppliers and customers; small and large companies; companies at the beginning, middle, and end of a supply chain – that embrace VMI applications and collaborate with their trading partners can achieve a number of important business benefits. Thus, it pays to connect via VMI applications, strive for the attainment of VMI-enabled competencies, and consider many of the implementation elements presented here.

Companies should realize that improved supply chain and business performance is not just a matter of installing the appropriate hardware and software, as some managers wrongly believe. To improve supply chain performance via a VMI application and achieve the consequent benefits, companies must follow these 10 simple rules:

• Maximize the sharing and integration of data and information to provide employees and managers with richer data sets and complete information
• Move away from just dyadic connections for greater access to upstream and downstream data and information to achieve more complete supply chain visibility
• Aggressively invest in ICT to enable supply chain visibility, greater access to data and information, and real-time integration of the supply chain
• Select, design, and implement VMI applications that are congruent with the company’s business approach – good fit with systems, processes, and strategic intentions is instrumental
• Aggressively invest in supply chain process redesign to align suppliers’ and customers’ supply chain processes, synchronize activities, and promote easy access to data and information
• With partners, redefine and jointly determine roles and responsibilities of supplier/customer personnel to be congruent with supply chain process modifications
• Obtain senior management and organizational support to successfully commence, continue, and conclude VMI initiatives
• Charge a cross-organization team with the responsibility to actively manage connected activities and events to nurture and maintain a strong supplier-customer relationship
• Forget about mandating relationships among partners: build trust through cross-organizational management, joint investments, and mutually beneficial working arrangements
• Finally, be proactive because some of the world’s largest, industry-leading companies are moving aggressively to improve their competitive and financial positions via connectivity enhancements

Hopefully, these directives will help companies better understand how to successfully create, manage, and/or benefit from an accelerated move toward connectivity.

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Conclusion

In conclusion, VMI applications enable several important competencies (for example, increased visibility of business events, materials, and products/services) that provide a number of important business benefits. As demonstrated here, a number of notable companies are aggressively improving their supply chains and gaining the benefits. Companies that aren’t equally committed need to reconsider and follow the 10 rules provided here.

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