Best Practices of VMI

7/26/2019 Best Practices of VMI

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BestPracticein

Implementing

VMIArecommendationbyECREurope


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BestPracticeinImplementingVMI

ArecommendationbyECREurope

ECREurope

ECREuropegatherstogetherallvaluechainpartners:retailers,manufacturersandserviceproviders,whoshare

acommonbeliefthatbyworkingtogetheronnoncompetitivematterswecanbringtransformational change

toourindustrythatbenefitsourshoppersandconsumers.

Asharedvision:Working togethertocreatevalueforconsumers inasustainablewayBetter, fasterandat

lesscostwithasharedbusinessprocessleadingtosharedbenefitsacrosstheValueChain.

This handbook is primarily aimed at supply chain professionals in retail industryfor Supply Chain, Logistics and IT

professionals. The manual is partly based on GS1 Switzerland Merchandise Planning Models Guidebook, published in

2013 and was completely reworked in 2014 under ECR Europe initiative by group of experts lead by Hele Hammer,

AssociateProfessoratTallinnUniversityofTechnology.


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Contents

ExecutiveSummary................................................................................................................................................. 4

1.

What

is

VMI

.....................................................................................................................................................

5

1.1. VMIprinciples.......................................................................................................................................... 5

1.2. VMIusageinEurope................................................................................................................................ 6

1.3. VMIModels:DistributionCenterversusDirectStoreDelivery............................................................... 6

2. VMIsetupprojectsteps.................................................................................................................................. 8

2.1. EvaluateVMIBusinessCase................................................................................................................... 10

2.1.1. BenefitsofVMI............................................................................................................................... 10

2.1.2. CostBenefitAnalysis:VMISavingsCalculator............................................................................... 11

2.1.3. Riskanalysis.................................................................................................................................... 14

2.2. PlanVMIproject:timeandresources................................................................................................... 15

2.2.1. VMIprojectschedule...................................................................................................................... 16

2.2.2.

VMIproject

organisation

................................................................................................................

16

2.2.3. Projectteamskillsandresponsibilities .......................................................................................... 17

2.3. SelectVMItargetcategoriesandproducts............................................................................................ 18

2.3.1. WhichsupplierstoincludeinVMIprogram?................................................................................. 19

2.3.2. Min/MaxstocklevelsforVMIproducts......................................................................................... 20

2.3.3. Determiningdeliveryunits/DCVMIfulltruckloads...................................................................... 21

2.3.4. ProductMasterData...................................................................................................................... 23

2.4. Terms:SetGoalsandTerms(VMIContract).......................................................................................... 25

2.4.1. KPIsformeasuringthesuccessofVMIproject............................................................................. 25

2.4.2. VMIContractbetweenvendorandretailer................................................................................... 28

2.5.

Align

IT

and

business

..............................................................................................................................

29

2.5.1. Internalandexternalbusinessprocesschanges............................................................................ 29

2.5.2. VMIprocessandEDIdocuments.................................................................................................... 30

2.5.3. VMItechnologicalsolution............................................................................................................. 32

2.5.4. SetupandtesttheVMIsolution.................................................................................................... 34

2.6. Rollout:PilotandOnboardPartners.................................................................................................... 36

2.6.1. PilotyourVMIprogram.................................................................................................................. 36

2.6.2. Trainandgolive............................................................................................................................. 36

2.6.3. Onboardadditionaltradepartners............................................................................................... 38

3. VMIperformanceandcontrol....................................................................................................................... 38

3.1. ReviewandAdjust................................................................................................................................. 38

3.2.

Monitorongoing

VMI

programs

............................................................................................................

39

3.3. ITsolutionsforKPImonitoring.............................................................................................................. 40

4. CriticalSuccessFactorsforVMIprojects...................................................................................................... 42

4.1. BusinessRelationshipfactors................................................................................................................ 42

4.2. Companyinternalfactors...................................................................................................................... 43

4.3. TechnicalandVMIspecificfactors......................................................................................................... 43

APPENDICES.......................................................................................................................................................... 45

Appendix1.ECRthinking.................................................................................................................................. 45

Appendix2.VMISampleContract.................................................................................................................... 46

Appendix4.MasterDataManagement:Background...................................................................................... 49

Appendix5.

Glossary

........................................................................................................................................

51

Appendix6.Demosoverview/VMIserviceproviders..................................................................................... 54


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ExecutiveSummary

Vendor Managed Inventory (VMI) is a replenishment strategy where the traditional ordering process is

eliminatedand thesupplierhastherightandresponsibility tomakestockreplenishmentdecisionsbasedon

regular automatic inventoryand / or sales data from buyer. This handbook on VMIcontains instructions for

practitioners,

explaining

automated

replenishment

processes

and

providing

support

for

project

managers

in

implementingVMIreplenishmentprocesses.

The decision to implement VMI is a strategic decision impacting many departments (logistics, procurement,

planning, sales and marketing) and strengthening cooperation between supplier and buyer. The aim of this

collaborationistomakethereplenishmentprocessmoreefficientatlesscost.

BusinesscaseforVMI

VMI programs offer the potential for dramatic improvements in supply chain and financial performance.

Replenishment decisions are made by the supplier based on agreed key performance indicators (KPIs),

including availability and stock turnover. Quantitative performance improvements that customersusing VMI

haveachievedinclude:

Increasein

availability

of

25%,

(and

related

increase

in

sales

revenues)

Reductionininventorylevelsof15to40%(andrelateddecreaseincapitalcosts)

Additional benefits include less OOS, more efficient production scheduling, improved responsiveness to

customerneedsandchangingmarketconditionsandbetterrelationshipswithpartners.

Thefollowingruleofthumbapplies:thebiggertheshippingvolumewiththebusinesspartneristhegreaterare

the percentagebased potential savings. It is estimated that savings up to 23% of total turnover can be

achievedwithVMIprogram,ifappliedcorrectly.

VMIsetupprojectsteps

Infirst

chapter,

the

6major

steps

in

aVMI

implementation

project

are

explained

in

detail.

CriticalSuccessFactorsinVMIProjectImplementation

SuccessfulVMIprojectsarebasedonanumberofkeyfactors:thecommitmentofseniormanagementfrom

both buyer and vendor organizations; welldefined agreements on goals, service levels, and risks; and tight

integration

with

systems.

With

these

elements

in

place,

good

communication

and

change

managementpracticescanhelpyouoverthefinishline.

Conclusionsfroma2014masterthesisdefendedatTallinnUniversityofTechnology,askingforexpertopinions

from theECRmembercompanies inEuropeaboutwhatare thecriticalsuccess factors forVMIProjects,are

presentedinchapter4.

LotofPracticalTipsandTricksinAppendices

Tipsforprojectorganisationand implementation andvariouschecklistsaswellasasampleVMIcontractare

included.


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1.

WhatisVMI

1.1.VMIprinciples

Supplychains

must

be

managed

to

ensure

that

all

supply

chain

participants

are

aligned

regarding

demand

and

agreedinventorylevels,andthereisareliablereplenishmentprocesstosecureproductavailabilitythroughthe

entiresupplychainatthelowestpossiblelogisticscosts.

Vendor Managed Inventory (VMI) is an alternative to the traditional orderbased replenishment practice,

beingamoreefficientsupplychain integrationstrategyandcollaborationconcept. InaVMIrelationship,the

supplierisempoweredtomanagecustomersinventoryandreplenishthegoodsatcustomersiteautomatically

underagreedconditionsandrules.Insteadofsendingthepurchaseorders,retailerssendinventoryandsales

informationelectronicallytosupplier.Basedonthisdemanddata,suppliermakesperiodicresupplydecisions

regarding order quantities, shipping, and timing (see Figure 1). The information about real demand will be

transparenttothevendor,reducinguncertaintyforitsproductionandoperationalplanning.

Figure1.ReplenishmentprocesswithVMI

Electronic Data Interchange (EDI) is used for exchanging relevant trade documents to ensure completely

automatedorderprocessing.Thisisassociatedwith investmentononehandandsavingsandefficiencygains

ontheother.

VMI is a tool which facilitates efficient processes in inventory management. The aim of VMI is to ensure

availabilityandfreshnessatthepointofsalewiththelowestpossiblelogisticscostsandmaintainingthelowest

possibleinventorylevelacrosstheentirepurchasingchain.

Thisis

only

possible

if

all

parties

speak

the

same

language,

share

an

understanding,

apply

the

same

standards

and methods and work together on a constructive basis. In any case, commercial pressure in the consumer

goods industry will force companies to further streamline their purchasing processes, in order to achieve a

sustainedincreaseinefficiencyandprofits.

VMIgivesthesupplierbothresponsibilityandauthoritytomanagetheentirereplenishmentprocess.

Thechangeisfundamentalbymakingtheavailabilityandinventoryturnoverthenewprimarymeasuresofthe

suppliersperformanceinsteadofdeliverytimeandpreciseness.

ThenatureandextentofVMIimplementation isnotanITprojectortopmanagementprerogativeimposingon

therest of theorganisation. AVMIproject is in facta majoreffort thatwill require participation frommost

departmentsoftheorganisationandwillinfluenceandchangeallofthedimensions.Therefore,Itisnecessary

toemployaholisticviewofstrategy,structure,people,andtechnology.


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1.2.VMIusageinEurope

ECRNI Established LocalECRmembers Marketshare1 VMIpenetration

RetailersSuppliers Total

ECRSwitzerland 1999 15 120 135 90% 5075%

ECRFrance 1997 17 45 59 90% 5075%

ECRAustria 1996 12 63 75 95% 1025%

ECRItaly 1993 14 46 60 80% 1025%

ECRBaltics 2007 4 12 16 50%


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Figure2.VMItobuyersdistributioncentre(warehousedelivery,DC)

VMIbetweenVendorandBuyerindividualstores(DSD)

WhilemostoftheVMIrelationshipsarebetweenVendorandBuyerDC,thereareagreementswherevendors

aremanagingtheirproductsattheretailstorelevel(seeFigure3).InDSDVMI,individualshopssenddailyPOS

(pointofsales) data and regular inventory data to Vendors. Similarly to DC VMI, Vendor and Buyer have to

agreeminandmaxstock levelsforeach item ineachstore.Usingdynamicminandmaxstock levels(inDSO

ratherthanunits,readmoreinchapter2.4),thisagreementismanageable.BasedonPOSdata,Vendormakes

replenishmentdecisionsanddeliversproductstoshops,ensuringavailabilityandoptimizinginventorylevels.

Figure3.

VMI

direct

to

stores

(direct

store

delivery,DSD)

IncontrarytoDCVMI, insteadofpotentialsavings intransportationcosts,DSDVMIwillmore likely increase

transportation costs for the supplierdeliveries are smaller and more frequent. However, increase in

availability, freshness and therefore, sales, usually more than offset the cost increases. DSDVMImodel also

requires much more sophisticated systems on both Buyer and Vendor side and high level capabilities on

Vendorside.

VMIversusCMI(CoManagedInventory)

Inadditiontodifferencesinoperatingmodel(DCversusDSD),therearevariationsofVMIdependingonwhere

the

right

and

responsibility

of

replenishment

decisions

lay.

InDSDVMI,usuallyretailershavedefinedproductassortmentsandplanogramsandallowvendorstomake

replenishmentdecisionsinthatframework.SomeVMIprogramsgoevenfurther:retailersallocateshelfspace


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andallowmanufacturerstoplanalsoproductassortmentsandfacingsinadditiontoreplenishmentquantities.

ThisrepresentstheultimateinVMI,givingmanufacturerscontroloverallmerchandisingdecisionsinindividual

stores.

Ontheotherhand,inbetweenBMI(BuyerManagedInventory)thetraditionalwayofproductreplenishment

andVMI,thereisalsoCMI(ComanagedInventory).Thekeydifferenceisthatorderplacedbythesupplieris

still

a

recommendation

and

is

not

a

firm

order

until

approved

by

the

customer

(see

Figure

4).

In

a

VMI

process,

the order generated by the supplier on the customer's behalf is a firm order to deliver product and bill the

customer. We can also distinguish between VRI (Vendor Replenished Inventory) and VMI, where the latter

would then include also ability to decide on assortment, notjust mecanically replenishing what has been

decided.

Figure4.Inventorymanagementmodelsoverview(BMIBuyerManagedInventory,CMI CoManagedInventory,VRIVendorReplenished Inventory,VMIVendorManaged

Inventory)

2.

VMIsetupprojectsteps

WhileemployingVMIinatraderelationshipingeneralisaprocessandnotaproject,thefirsttimetheVMI

isimplemented,itshouldbemanagedasaprojectinordertobesuccesful.AVMIprojectcanbedividedinto

sixbasicphases(see

Figure5).

1.

EVALUATE:Business

case

2. PLAN:Projectdefinitionandplanning

3. TARGET:Choosecategoriesandsuppliers

4. TERMS:Setgoalsandterms(contract)

5. ALIGN:AlignITandbusiness

6. ONBOARD:pilotandonboardsuppliers


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Figure5.ThesixstepsinaVMIproject


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2.1.

EvaluateVMIBusinessCase

An ideaforaprojectshouldbecarefullyexamined todeterminewhetherornot itbenefitstheorganization.

Duringthisphase,adecisionmakingteamwillidentifyiftheprojectcanrealisticallybecompleted.

InVMImodel,shorttermdemandforecastingonretailersideandflowofpurchaseordersareremovedfrom

the supply chain. Absence of these elements eliminates delays in information and product flows, and

significantlydecreasestheimpactofuncertaintyanddistortioninsupplychaindecisionmaking.

2.1.1. BenefitsofVMI

ThebenefitsofVMIaremainlyrelatedtocostreductions,service improvementsandgreatertransparency in

thesupplychain.QuantitativeperformanceimprovementsthatcustomersusingVMIhaveachievedinclude:

Increaseinavailabilityof25%, (andrelatedincreaseinsalesrevenues)

Reductionininventorylevelsof15to40%(andrelateddecreaseincapitalcosts)

Thebenefitscanbegroupedintothree:1)sharedgainsofVMI,2)buyerspecificgainsand3)vendorspecific

gains(seeFigure7).

SHAREDGAINSFROMVMI

Betteravailabilityandlessoutofstock(OOS):higher

revenues

VMImakesitpossibletodeliverrightproductsattherighttime

totherightplace.Theavailabilityofstockandsalesdataat

shoplevelhelpssupplierstomakebetterreplenishment

decisions,avoidingOOSandincreasingOSA.Additionally,

visibilityatbuyerlevelisusefulwithpromotions,asthose

productsthathaverunoutcanbequicklyreplenished.

Lowerinventorylevels:releasedworkingcapital

Fasterinventoryturnsmeanthatinventorylevelscanbe

reduced.

As

real

demand

is

shared

with

supply

chain

partners,

alsothereservestockcanbesmaller.Lowerinventorylevels

meansavingsincostofcapital,aslesscapitalistiedupinthe

inventories.

Fasterinventoryturns:fresherproductsandlessmarkdowns

Asstockisreplenishedmoreoften,theproductsarelesslikely

tobecomeobsolete.Thisdecreasestheneedtosellleftover

stockwithreduced rices.

FredMeyer,the131unit

supercenterschaininAmerica,

reduceditsinventories30%,while

salesroseandservicelevels

increasedto98%. Thiswasdueto

aVMIprogramimplementedwith

twoke

ood

vendors.

OshawaFoods,a$6billion

Canadianfooddistributorand

retailer,hadtremendoussuccess

withPillsbury,QuakerandH.J.

Heinzwithturnsimprovingfrom

3to9times,whileachieving

customerservicelevelsof99%.

This,however,cameaftersome

initialadjustments

in

the

programbecauseofthehasty

natureofinitial implementation.


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Figure6.BenefitsofVMItobuyerandvendor

Figure7.BenefitsofVMI:Sharedgains,vendor

specificgainsandbuyerspecificgains

AllthosenumerousbenefitsdescribedonFigure7formulatethesetofthereasonswhyVMIconceptshouldbe

implemented. As specific benefits depend on particular business case, it is crucial for all parties involved to

analyse and understand the possible benefits, and have a buyin into the idea. Only then could VMI be

implementedsuccessfully.

2.1.2. CostBenefitAnalysis:VMISavingsCalculator

In order to calculate return on investment (ROI), in addition to revenues also costs should be estimated.

Implementing VMI requires investments like executing any other project in the company. The costs of

implementingVMIvarytoa largeextentanddependondifferentcharacteristicsofthecompanysuchasthe

size of the company, the ERP systems used in the company, the role of the company in the supply chain

(vendor/buyer)andsoon.

Thecostscanbedividedintotwogroups:1.Initialinvestments,2.Operational(ongoing)costs.

1.VMI

project

initial

investments

2.

VMI

operational

costs

Initial costs include investments into business process The costs which continue with the use of VMI after

GrandUnion,aNewJerseybased

groceryretailerwithmorethan

100storesandthreeDCs,

improvedinventoryturnsbyclose

to80%

and

achieved

99%

service

levels. Thissignificantlyimproved

salesbyeliminatingoutofstock

conditionsanddramatically

reducedwarehousingcosts.

BUYERSPECIFICGAINSFROMVMI

Reduction

in

ordering

costs

Sinceorderingfunctionshasbeeneliminated

fromtheprocess,thebuyersbenefitfrom

reductionofadministrativeexpenses.Asthe

numberofbackordersandreturnsreduce

significantly,administrationcostsdecrease

evenmore.

Optimizedretailspaceproductivity

Asbothgeneralinventoryandsafetystock

levelsarereducedwithVMI,thisallowsfor

possibilitytoincreasetherangeofgoods

offered.

VENDORSPECIFICGAINSFROMVMI

Productionaligned

to

customer

demand

Theautomatedandregulardataexchange

ensuresacontinuousdemandinformation.

Upstreamproductionalsoreceivesconsumption

figuresregularly,makingitpossibletoplanthe

nextoptimumproductiondate.Thisproducesa

furtherreductioninthesupplychaininventory

levelsandtheassociatedcostofcapital.

Optimisationoftransportationcosts

ForcentralwarehouseVMI,itispossibletoaim

forfulltruckloadsandtransportationcosts

optimization.Automaticexchangesofuptodate

stock

data

and

sales

figures

result

in

sensible

ordervolumes,i.e.fullpallets,whicharedelivered

dailytogetherwithotherproductsofthevendor

asfulltruckloaddeliveries.


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change,newsoftwaresystems,andpersonneltraining:

VMIsoftwareandhardware

Costofchangingbusinessprocesses

ITsupport inhouseandexternal

Personneltrainingcosts

Projectmanagementcosts

GS1

Switzerlands

(2011)

estimation

of

total

costs

for

a

vendor company setting up VMI were about 75 to 130

thousand. These estimations were done for companies

settingupVMIforthefirsttime.Thecostforsettingupan

additionalVMIpartnership(withanotherretailer)shouldbe

considerablyless,amountingto 20%oftheinitialcosts.

Thecostsforabuyercompanyare2/3less,consideringthat

theVMItechnologicalsolutionwillbesetup atvendor,not

buyerside.

implementationarethefollowing:

VMI process manager/team costs. The extent of

personnel used in VMI process depends on one hand

which VMI level is chosenis it pure VMI or is it co

managed inventory (in latter case, there is a VMI

manageronbuyersideaswell).On theotherhand, the

amount of work on vendor side depends on which VMI

model ischosen,DCorDSDVMI. InDSDVMI,at least1

FTEshouldbeplannedforthework.

VMIoperationalcosts. Operationalcostsincluderunning

costs of new equipment and new software (a VMI

solution for vendor, and potential adjustments in buyer

system),ITsupportforVMIsolution,andelectronicdata

interchange(EDI)coststoserviceprovider.

Inaddition,ifconsignmentispartofthedeal2,runningcosts

alsoincludeinventorycarryingcostsforsuppliers.

VMIsavingscalculatorforVendor

Onehandytooltoestimatethenetbenefits(allpotentialsavingsminusallpotentialcosts)fromswitchingto

VMI is to use a VMI savings calculator. This is a strategic level tool for defending the business case to your

partnersoryourmanagementboard.Forexample,asimpleExcelbasedcalculatorcreatedbyTelemacanbe

used.TheTelemaVMISavingsCalculatorincludesseparatemodelsforbuyersandvendors.

InTelemaVMISavingsCalculatorfor theVendor,allcells inbluearecells thatshouldbefilledwithrelevant

dataforthespecificcompany(thenumberstherearejustanexample).ForVendor, thefollowingshouldbe

enteredasinputs:

VMIshareofallbusiness,

totalsalesandsalesmargin,

accountsreceivable,

transportationcosts,and

weightedaveragecostofcapital.

For calculator to work, the user should estimate the extent of VMI benefits. For vendor, these are in three

categories:Accountsreceivable(AR)reduction,reducedtransportationcostsandincreasedsales.

Next,bothinitialinvestmentandongoingaverageannualoperationalcostsshouldbeestimated.Asexplained

inpreviouschapter,vendorbearsbiggerinitialsetupcoststhanbuyer,asthetechnologicalsolutionwillbeset

upatthesupplier.TheresultingsavingscalculationforVendorisdepictedonFigure8.

2

Largeretailers

may

rely

on

their

leverage

to

pressure

the

vendor

into

consignment

deals.

These

customers

own

the

current

inventory

at

their locations.Oncetheconsignmentagreementhasbeensettled,customersstillhave inventoryattheir locationsbutthecapitalofthe

inventory isdisengaged.By entering into consignment agreementswith supplier, customersare effectively transferring their inventory

carryingcostandcapitalopportunitycosttothat supplier.


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Figure8.SampleVendorVMIcalculationsusingTelemaVMICalculator

VMIsavingscalculatorfortheBuyer

Justlikeforvendors,itisusefultohaveahandytooltoestimatethenetbenefits(allpotentialsavingsminusall

potentialcosts)fromswitchingtoVMIforbuyers.TheTelemaVMISavingCalculatorisisastrategicleveltool

fordefendingthebusinesscasetoyourpartnersoryourmanagementboard.

As in Vendor calculator, all cells in blue are cells that should be filled with relevant data for the specific

company(thenumberstherearejustanexample).ForBuyer,thefollowingshouldbeenteredasinputs:

VMIshareofallbusiness,

currentinventoryonhand,

annualsalesandsalesmargin,

numberof

purchase

orders

and

order

processing

cost

per

order

weightedaveragecostofcapital.

For calculator to work, the user should estimate the extent of VMI benefits. For buyer, these are in three

categories:inventoryreduction,reducedorderprocessingcostsandincreasedsales.

Next,bothinitialinvestmentandongoingaverageannualoperationalcostsshouldbeestimated.Asexplained

in previous chapter, buyer bears less costs than vendor in setting up the VMI system, as the technological

solutionwillbesetupatthesupplier.TheresultingsavingscalculationisdepictedonFigure9.


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Figure9.SampleBuyerVMIcalculationsusingTelemaVMICalculator

2.1.3. Riskanalysis

WhiletherearenumerousbenefitsofVMI(seeFigure7),someconcernshavetobetakenintoaccount.Outof

tenVMIimplementations, onlythreeorfourachievegreatsuccess,threeorfourreapsomebenefitsbutnotas

much asanticipated, and two or three fail3.The confidentiality of information sharing between retailer and

supplier,theriskoflossofcontrolbytheretailer,thepotentialincreaseinvendorsadministrativecostandless

thanexpectedbenefitsforsupplierarethemajorpotentialshortfallsofVMI.

(Carlosaidhewillimprovethischapter)

3E2Openwhitepaper


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Figure10.RiskandmitigationplanduringVMIimplemantation

Figureunderconstruction,inputwelcome.

BusinessCase

chapter

needs

conclusion,

something

like:

Afterhavingthefinancialfeasibilityandoperationalfeasibilityaswellasriskanalysiscovered,theproject

managerisreadytopresentthecasetotopmanagement.

2.2.

PlanVMIproject:timeandresources

Veryimportantforthesuccessofaprojectisitswellplannedcommunication.Forthat,itisadvisabletochoose

anamefortheproject,determinethetimeframe(startandenddates),writeashortbusinessoverview,clearly

definethegoalsoftheproject,dividerolesanddutiesofproject,andplanforcommunication(whoisinformed

whenaboutwhat).

In early stages, it is appropriate to advise two to three members of the management team before officially

presentingthebusinesscase.This lobbyingwork isvery importantforthefurtherprojectstages. Itresults in

relevantfeedback,whichmaybehelpful inboththedecisionmakingmeetingandsubsequentmeetingswith

thepartner.

A projectplan should be put in writing, outlining the work to be performed. Duringplanningphase, a team

should prioritize the project, calculate a budget and schedule, and determine what resources are needed.

Resources' tasks are distributed and teams are informed of responsibilities. The project plan should also

describe which questions will be answered in what stages of the project. Table 1 describes the factors

important

for

successful

change

project

execution.

Table1.Successfactorsforchangeprojects

SUCCESSFACTORSINCHANGEPROJECTS

Strongandconsistentsupportandcommitment

fromtopmanagementisprovided

Adequatecompositionofthechangeteam(inboth

breadthandknowledge)

Strategicalignmentwithcompanystrategic

directionobjectivesfortheprojectisdefined

Availabilityofresources(establishingresourcebase

onfrontend),includingthefinances

Compelling

business

case

for

change

with

measurableobjectives,i.e.clearcost/benefit

analysisisavailable

Employee

involvement

(through

communicating

andempowering),i.e.usersoftheVMIsolutionare

involvedintheimplementation stage


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Provenmethodologythatincludesavision

process

Establishtimelimitontheproject(decideon

timeframetoavoidoverruns)

Effectivechangemanagement,stronganddedicatedprojectmanager,rolesandresponsibilities clearly

assignedtoteammembers

Source:

Based

on

Business

Process

Reengineering,

2000

2.2.1. VMIprojectschedule

Theprojectscheduleisthetoolthatcommunicateswhatworkneedstobeperformed,whichresourcesofthe

organizationwillperformtheworkandthetimeframesinwhichthatworkneedstobeperformed.Theproject

schedule should reflect all of the work associated with delivering the project on time. Without a full and

completeschedule,theprojectmanagerwillbeunabletocommunicatethecompleteeffort, intermsofcost

andresources,necessarytodelivertheproject.

For VMI, it is estimated that it can take 68 months elapse from the initial idea to the review. The actual

planningphasecanbecompletedinjustafewweeks.

Agraph

with

steps

and

appropriate

time

periods

would

be

nice

here,

like

this:

Figure11.VMIsetupprojectapproximatetimeline

(explainthefigure,makeitbigger)

Itisrecommendedthattheprojectstagesbecoordinatedandimplementedjointly.Priortotheactual6stage

process, the commitment of both management teams to joint clarification of any issues related to VMI

implementation is required. Without such commitment, the chances of the project being on time,

commerciallyadvantageousanddeliveringsustainablesuccessforbothpartiesaresmall.

2.2.2. VMIprojectorganisation

ImplementingVMIinvolvesmanydepartmentsacrossbothvendorsandretailersorganisations.ForVMI

project,apossibleorganisationalstructureisasdepictedonFigure12.Inthiscase,thevendorandretailer

determinetheprojectteamafterjointlydecidinginfavourofaVMIsolution.Theprojectteamincludes

employeesresponsibleforimplementation.Afterimplementation, vendorscustomerservicesdepartmentisin

chargeforthedaytodayoperation.


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Figure12.SuggestedProjectorganisationforanVMIproject

TheVMIprojectmanagerhasoverallresponsibility fortheproject.Hereportstotheprojectcommitteeand/

orprojectsponsor,whointurninformstheclients.Theindividualemployeesinvolvedinprojectfromvarious

departments both on the vendors and retailers side, are given their tasks and deadlines by the project

manager.Theyinturnreportbacktotheprojectmanageronthestatusoftheirwork.

Due to the fact that two parties (vendor and buyer) are involved in the project, it is recommended that a

project sponsor be elected. He reports to the management and the project committee and coordinates the

project team. Although all parties have responsibility for the success of the project, the role of the project

sponsorisofparticularimportance.Heisnotonlyatthetopoftheprojecthierarchy,butmustalsoensurethat

one of the most frequent reasons for projects failing is avoided, namely lack of support from the top

managementoftheparticipatingcompanies.Moreaboutkeysuccessfactors inVMIprojectscanbefound in

Chapter4.

2.2.3. Projectteamskillsandresponsibilities

ResponsibilitiesforeachactivityinaVMIproject

should be assigned to specific team members.

The RACI model brings structure and clarity to

describing theroles thatproject teammembers

play in a project RACI model is a matrix that

clarifies responsibilities and ensures that all

activitieswill

be

done.

ToapplytheRACImodel,allactivitiesshouldbe

listed, and for each activity then specified who

isResponsible, who isAccountable, and where

appropriate, who needs to be Consul

tedorInformed (see panel on the right for

explanations).

Using a RACI model promotes common

understanding of processes related to

implementing VMI. A sample RACI chart

describingimplementingVMIisshowninTable2.

Asarule,

only

one

person

(role)

should

be

accountable

for

each

process.

However,

several

persons

may

be

responsiblefor,consultedonor informedaboutanactivity. Itmayalsohappenthataperson isatthesame

timeaccountableandresponsibleforanactivity.

RACIchartusesthefollowingdefinitions:

Responsiblefortheactualimplementation.Theperson

who takes the initiative for implementation (by others)

or who himself implements the activity. This is also

interpretedasresponsibilityinthedisciplinarysense.

Accountable forcostswith responsibility in thesense

ofapproval,

granting

or

signing.

The

person

who

is responsible in the legal or commercial sense. This is

also interpreted as responsibility from a cost centre

pointofview.

Consulted advisory role (specialist responsibility). A

person who is consulted for advice. This is also

interpretedasresponsibilityfromatechnicalstandpoint.

Informed to be informed (right to be given

information). A person who receives information about

progressand/ortheoutcomeofanactivity,orwhohas

therighttobeinformed.


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18

Table2.RACIresponsibilitieschartforVMIproject

TaskProject

manager

Customer IT

manager

Marketing Sales Customer

services

Master

data

Definetarget

categories

and

suppliersR/A C C C C

Comparemasterdatawith

customerR/I A C C C A

Specifybusiness processes R/A C C

Specifytechnicalprocesses R/C C A C

VisualiseITsystems

architectureA I R I I

Errorhandlingingoods

delivery R/I R C C

SpecifyKPIsand project

reviewR/A C C

RResponsibleforexecution

AAccountableforimplementation

CConsultedforagreementandcoordination

IInformedaboutprojectprogress

ThemainskillsneededfortheVMIprojectmanagerare:

Deepprocessunderstandingregardingorderingprocess

Understandingdifferentapproachesofplanningprocess

Understandinghowpromotionsimpacttheregularbusiness

Interfacemanagementskills

Skillsdodeveloptestprocedures,

Skills to develop exception reports to monitor the day to day operation and standard reports for

internalandexternaluse

Listeningskills

Executionskills(makethingshappen)

Deliveryontime(tobearolemodelfortheteam)

In case those skills are not available, it is strongly advised to acquire external support. Many managementconsultancies, EDI service operators and VMI solution providers can help with professional VMI project

managementsupport.Thiswillgreatlymitigatethegoliverisk.

2.3.SelectVMItargetcategoriesandproducts


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19

2.3.1. WhichsupplierstoincludeinVMIprogram?

PastexperiencewiththeimplementationofvariousVMIprojectshighlightsthatanypreviouscollaborationon

optimization (efficient product introduction, efficient promotions and efficient placement) facilitates VMI

implementation,asthepartiesalreadyknowandtrustoneanother.

WithwhattypeofcompaniesandproductswillVMIwork? ApopularbeliefisthatVMIisvaluableonlyforhigh

volume items with relatively stable, predictable and repetitive demand tojustify the additional investment

requiredfor

starting

VMI

(Cooke,

1998).

WalMart

and

Procter&Gamble

have

had

aVMI

program

together

for

over 25 years to manage the inventory and production of disposable diapers with great success. Inventory

turnsdoubled,WalMarts'operatingcostsfell,andP&G'smarketsharegrew.

Clark&Hammond(1997)andDeakins(2008)bothshowthatVMIismoredifficulttoimplementwhendemandis

volatileornotreasonablypredictable(fashions,seasonalfoods,etc.).Disney&Towill(2003a)studiedtheeffectof

VMIonthebullwhipeffectforbothlow andhighvolumeproductionandshowedthatVMIhaspositiveeffecton

bothlowvolumeandhighvolumeproducts.

Thereareindustrieswherethevolatilityofconsumerdemand,localconditionsormarketsizedictatethatthe

buyershouldretaincontrolof inventoryreplenishment. ThiswasthecasewithKMart,whichafterreducing

thenumberofvendorsitworkedwith(from300to50)andimplementingVMIdiscoveredthatitsownbuyers

coulddoabetterjobofforecastingconsumerdemand incertaincircumstances. Somemarketconditionsdo

notmake

VMI

the

best

solution

and

tailored/hybrid

approaches

need

to

be

explored.

Niranjanetal.(2012)havedevelopedatoolkitforpractitionersthatenablemanagerstodeterminewhethera

company isreadyforVMI.They listfifteendeterminantsdividedinthreedifferentareas:1)buyerspecific,1)

productspecificand3)vendorspecificprerequisites(seeFigure13).

Figure13.The15featuresthataffectanorganizationsreadinessforVMI

Source:AdoptedfromNiranjan,WagnerandThakurWeigold,2011

For

example,

Niranjan

et

al

state

that

a

retailer

for

whom

purchasing

is

the

core

competency

would

be

reluctanttoadoptVMIandmay insistonretainingthetraditionalpurchaseorders.Thecriteriamarkedwith

stars on Figure 13 are those that can be improved/changed. For example, good information and

buyer/vendor

Vendors

BUYER VENDOR


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20

communicationsystemmaynotyetbeinplace,butcanbebuiltovertime.Willingnesstoshareinformationis

alsoamatterofdecision.

Theauthorsofthecurrentmanualbelievethatinadditiontothe6starredcriteria,thereareothersthancan

beinfluenced.Eg,ifstandardproductidentificationisnotyetinplace,thiscanbeinstituted.Onvendorside,

bothadvantagesevidenttobothvendorandbuyerandvendorsarewillingtocooperatearecriteriathat

can

be

influenced

trough

communication

and

enlightenment,

trough

sharing

VMI

related

information.

One

potentialtoolforthatcommunicationisthemanualathand.

FrankehasstudiedVMIadoptioninXindustriesandcarriedoutasurveyaboutbuyerchoosingistsuppliersfor

theVMIprogram.Althoughinanotherindustry,theresultsareusablealsoinFMCGsector.Whendecidingon

whichpartnerstoincludeintheVMIprogram,wesuggenttolookattheissueslistedinTable3

Table3.IssuestoconsiderwhenchoosingtradepartnersfortheVMIprogram

IfyouareaBUYER,considerthefollowingissues IfyouareaVENDOR,considerthefollowingissues

Locationofthesupplier Locationoftheretailer

Categoryofproductssupplied(ie,milkvsclothes)

Volumeoftrade/marginwithparticularsupplier Volumeoftrade/marginwithparticularretailer

Pastrelationshipexperience(length,quality) Pastrelationshipexperience(length,quality)

Pastdeliveryreliability

Shareofpromotionalsalesvsregularsales

For

VMI

rollout,

it

might

be

useful

to

reduce

the

number

of

suppliers

to

get

the

critical

volume.

The

purchasing

departmentshouldevaluateanddecidewhichvendorrelationshipshouldbestrengthenedtogetmorebenefit

outofit.

2.3.2. Min/MaxstocklevelsforVMIproducts

Forproducts included in theVMIprogram, thenextstep is todetermineMin/Maxstock levels forproducts.

TheMin/Maxmethodwasoneoftheearliestautomatedinventoryreplenishmentmethodsusedinenterprise

softwarededicatedtoinventorymanagement.TheMinvaluerepresentsastocklevelthattriggersareorder

andtheMaxvaluerepresentsanewtargetedstocklevelfollowingthereorder(see

Figure14).

Figure14.Min/Maxinventorysystem

TheMin/Maxmethodtracksthecurrenttotalstocklevel,whichistypicallythesumofthestockonhandplus

the stockonorder for every single SKU (product). When total stock reaches the Min value, a reorder is


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21

triggered.ThereorderquantitytargetstheMaxvalueforthenewtotalstocklevel,henceinsimplestform,the

reorderquantityisthedifferencebetweenMaxandMin(i.e.MaxminusMin).

Anumberofapproachesmaybeused todetermine thesizeofMinandMax inventory levels.TheMin/Max

levelsmaybesetmanuallyorautomatically(byadownloadfromanERPsystem).

Therearemanywaysofcalculatingtheminmaxlevelsforparticularproducts.Tocalculateminmaxlevels,most

modelsneed:

1. thereplenishmentleadtime,

2. servicelevelrequired,

3. orderfrequency,and

4. historicalweeklydemand.

DynamicMin/Maxquantities.

Initsoriginalform,Min/Maxorderingwasconsideredtobeafairlystaticmethodofinventorycontrolwherethe

Min/Maxvalueswererarelychanged,maybeafewtimesperyear.Marqusetal.(2010)haveproposedthatthe

definedMin/Maxquantitiesshouldbedynamicandfollowtheseasonalityandsalesof theproducts forbetter

performance.ThisprincipleissupportedalsobyClaassen,vanWeele,&vanRaaij(2008),whostudiedfivecasesin

differentindustries,andHenningsson&Lindn(2005),whostudiedIkeasVMIapproach,concludingthatdynamic

arrangementfor

minimum

and

maximum

inventory

levels

should

be

preferred

over

static

ones.

ForDCVMI(VendortoBuyerDistributionCenter):Itisadvisabletouseminimumandmaximumtargetsindays

ofsales(DOS).

Itisnotsmarttosetverylowtargetsrightaway,instead,a3phaseprojectwithgraduallylowerstock

levesisrecommendedinordertonotriskproductavailability.

ForDSDVMI(VendortoBuyerindividualshops):Itisadvisabletouseminimumandmaximumtargetsinunits.

Smallershopshavelowertargetstocklevelsthanbigger(orbetterlocated)shops.Incasethedemand

ofthebettersellingshopsishigherthanonetradeunit(TU)perweek,itisrecommendedtoincrease

thefrequencyofdeliverytoensureproductavailability.

2.3.3. Determiningdeliveryunits/DCVMIfulltruckloads

Once Min/Max levels are set for products, next step is to define the ideal replenishment quantity for each

product,takingintoaccountexistingstocklevelsandavailabilityrequirements.Ideally,fullpalletsareshipped

to

the

customer

and

delivered

together

with

other

products

as

a

full

truck

load.

Unfortunately,

this

is

not

alwayspossible,sotheaimmustbetooptimisetheratiooflogisticshandlingcostsandtheaverageinventory

levelintransportation unitsormoney.

Asarule, thevolumeofpromotions isunderestimated. Inmanybusinessrelationships, promotionsaccount

forabigshareandhavealsoadirectimpactonsalesofstandardproducts.Figure15illustrateshowsalesofthe

standardproductfallduringapromotionalcampaign.Suchmassivefluctuationsinsalesmustbeanalysedprior

to technological implementation. It is advisable to use 26 weeks of information. Based on the results, the

correct inventory Min/Max settings must then be aligned with the sales and planning department and

programmed.

Lesswellknown fact:the targetMin/Maxvaluesmaybeexpressed inadditon tounitsalso in

daysofsales (DOS).HavingMin/Maxvalues indaysofsalesratherthan inunitsmakesthem

automaticallydynamic. However,notallsystemsareabletohandleMin/MaXvaluesinDOS.


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22

Figure15.Impactofpromotionsonsalesofstandardproducts

Todetermineweeklyreplenishmentquantitiesandunits,ananalysisbasedonhistoricaldatashouldbecarriedout.

Weeklyconsumption(incases)iscomparedwiththestandardpalletsize.Iftheweeklyrequirementisamultiple

of the standard pallet size, the conditions for sustainable and successful VMI process optimisation for both

businesspartnersareinplace.InTable4,itemsmarkedingreenareobviouscandidatesforfullpalletdeliveries

due

to

the

high

weeklydemand.

Some

items,

which

have

also

been

defined

as

suitable

for

VMI

(marked

in

amber)aredeliveredinindividualcasestoensurefreshness.Itemshighlighted inredarealsopartofthedefined

VMIproductrange,butwillbereplenishedasdisplayorlayer.

Table4.Determiningweeklyreplenishmentneedsanddeliveryunits

MasterdataHistoricaldata,

26weeksProposal

Vendor

itemno.Itemdescription

Casesper

pallet

Averageweekly

consumption in

cases

Palletsper

week

Optimal

deliveryunit

10103

Pluto

58g

72 324 4.5 Full

pallet

10104 Plutominis1kg 125 185 1.5 Fullpallet

10120 Plutominiatures75g 125 325 2.6 Fullpallet

10121 Plutominiatures150g 125 23 0.2 Case

10125 Plutominiaturesdisp.1,500g 4 480 120.0 Display

32120 Longgrainrice1,800g 72 36 0.5 Case

32200 Longgrainrice900g 144 933 6.5 Fullpallet

42321 pro.activmilk 72 133 1.9 Fullpallet

Onthebasisofthisevaluation,thedecisioncanbemadewhichdeliveryunit(e.g. fullpallet,display,unitor

case per item) is triggered toensure that the target DOS (days of sales) isnot exceeded. Minimum stockor

reservestock isassumed,whichcoverstheaveragerequirementforXdays. Iftheresponsetime isshort, i.e.

theproductsindemandareregularlysupplied;thereservestockmaycovertwotofourdays.Ifreplenishment

takes longer,oroccasionaldelivery interruptionsareexpected,theminimumstockshouldcoverat leastone

week.

Thiscalculationalsofacilitatesthecalculationoftheweeklydeliveryvolume.Inaddition,anoptimisedorder/

deliveryrhythm isderived,whichmustthenbediscussed indetailwiththepartner.Theseparameters,which

havebeenoptimisedintransportterms,canbestoredintheVMIsolutionorthecompanysownERPsystem

and

fixed

settlement

prices

(e.g.

shuttle

tariff

&

express

surcharge)

defined

together

with

the

logistics

service

provider.Bymanagingfulltruckloads,transportcostsarecutwheretoomanypartialdeliverieswerepreviously

triggeredbytheretailer.


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23

Automaticexchangesofuptodatestockdataandsalesfiguresmakeitpossibletooptimisetheorderdatein

the continuous replenishment process. This results in sensible order volumes, i.e. full pallets, which are

delivered daily together with other products of the vendor as full truck load deliveries. (However, it is

mandatory for these to be coordinated with the retailer in advance (specify in VMI contract), so that

unnecessarystockisnotincreasedontheretailerssideorthebestbeforedateproblemexacerbated.)

Type Fulltruck load

(FTL)

Weekly

require

mentin

pallets

No.of

pallets/

truck

Maxi

mum

weight

Leadtime

forrepl.

Combin

ation

options

FTLtariff

inEUR

Express

sur

chargein

EUR

No.of loads

perweek

Road Confectionery 52 34 18t 12hrs Non 2

Road Nonperishables/ 128 34 18t 12hrs 3plus

Rail Nonperishables/ 54 64 28t 24hrs 1

Road Promotions Adhoc 34 18t 48hrs Non

Total Weekly 234

Nowthattheconsignmentvolumeandconsignmentfrequency(order/deliveryrhythm)havebeendefined,the

optimumweeklydeliveryschedulecanbepreparedwith thecustomer.Adistinctionmaybemadebetween

deliverybyrailorroad,dependingontheproductrange.

Table5.Sampledeliveryschedule

Type

Productrange

Mon

Tues Wed Thurs Fri Sat

Sun

Confectionery,chilled 1 0.30 10.30 10.30**

Road Confectionery,chilled 15.30* 16.30*

Road Nonperishables 9.00 9.00 9.00

Rail Nonperishables 11.00 11.00

Rail Nonperishables 23.00*** 23.00***

Road Promotions X**** X****

Road Promotions X**** X****

* Reservedeliveryslotforadditionalquantities

**

Reservedelivery

slot

after

discussion

with

goods

in

department

*** Reservedeliveryslotforrailtransport

**** Afterdiscussionwithgoodsreceiptdepartment

Explanation: an additional reserve delivery slot is defined for each day to ensure that ramp capacity is not

overextended if additional quantities are required and other suppliers do not face delays as a result. With

regardtopromotionquantities,separatedeliveryslotsshouldideallybedefined.

2.3.4. ProductMasterData

Accurate master data management is a prerequisite for

vendor managed inventory. In master data management

Masterdataistheconsistentand

uniformset

of

identifiers

and

extended

attributesthatdescribesthecore

entitiesoftheenterpriseincluding

customers,prospects,citizens,

suppliers,sites,hierarchiesandchartof

accounts.


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24

(MDM),businessand ITworktogethertoensuretheuniformity,accuracy,stewardship,semanticconsistency

andaccountabilityoftheenterprisesofficialsharedmasterdata.

____

Master data relevant to VMI includes product related master data and location related master data. It is

importantthatvendorand buyerareabletoexchangeproductrelatedmasterdataaccuratelyandtimely.

All retailers need product master data (product attributes like codes, sizes, colors, units, prices etc) from

vendors. Most retailers have established a certain form (often in Excel) on which allrequired data about all

productsneedstobesent.OftentheserequirementsaremoreextensivethanvendorssERPscanprovide.

RegardingVMI,thereareafewproductmasterdataattributesthatwillbeadditionaltothoserequiredwithout

VMI,mostimportantly,theMin/Maxstocklevelsforeachproduct.

Table6.ProductMasterDatarelevantinVMIprogram,ontradeunitlevel

Field Explanation Samplevalue

1 GTIN GlobalTradeItem

Number

120788734657

2 Description Itemdescription ChocolateBar

3 CU ConsumerUnit piece

4

TU

Trade

Unit

package

5 LU LogisticsUnit pallet

6 CU/TU CUsperoneTU 12

7 TU/LU TUsperoneLU 108

8 Rep.unit Inwhichunitswillthe

itembeordered

CU/TU/pallet

9 Promo Iteminpromoornot Y/N

Product master data isoneof thecomplex data to manage.Thereare manyprovidersoffering solutions to

managemasterdataeffectively.OrganizationshavetochooserightPDMproductwhichiseasytoconfigure,is

highly customizable, extensible and at the same time upgradable. A sophisticated PDM implementation can

havedramaticeffectsonrevenueandincreasingprofit.Theleading15PDMsoftwaresolutionsarelistedhere:

http://www.cpcstrategy.com/blog/2015/02/15 pimsoftwareretailers/

Table7.LocationmasterdataneededinVMIprocess

Field

Explanation

/

Sample

value

1 ShiptoaddressGLN

ProductMaster

Data

needs

to

be

synced

with

vendorandbuyeraccuratelyandtimelytoensure

thesuccessoftheVMIprogram.


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25

2 InvoicetoaddressGLN

3 Replenishmentfrequency Daily/weeklyorMoandThu

4 Agreeddeliverytime 10:00a.m.

2.4.Terms:SetGoalsandTerms(VMIContract)

WhenproductrangeforVMIidentified,volumesanddeliveryschedulesdetermined,theseshouldbeagreedin

writing.A

VMI

contract

or

aVMI

appendix

to

existing

trade

contract

should

be

prepared,

discussed

and

signed.

AVMIagreementshouldincludesixmajorchapters(seeFigure16).

Figure16.MainchaptersinVMIcontract

Hereacoupleofparagraphsareneeded,referringtoappendixwherethesamplecontractis.

AcomprehensivesampleVMIcontractcanbefoundinAppendixX.

2.4.1. KPIsformeasuringthesuccessofVMIproject

For the VMI project to work, it is necessary to set common goals and use clear key performance indicators

(KPIs)fromthestartoftheproject.KPIsareasetofmeasuresfocusingonthoseaspectsofperformancethat

are the most critical for the current and future successof the project. Thebenefitsof the VMI program are

normallyevaluatedagainstasetofperformancemeasuressuchasshownonFigure17.


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26

Figure17.PerformancemeasuresofaVMIprogram

A special survey about which KPIs should be used in VMI projects was carried out in 2014 among the ECR

membercompaniesinEuropebyTallinnUniversityofTechnology.33expertsanswered,identifyingtwomajor

VMIprojectKPIgroups

1) Inventorylevel,measuredindaysofsupply(DOS)

2)

Availability,measured

by

on

shelf

availability

(OSA)*

and

out

of

stock

(OOS).

*ForcentralwarehouseVMIprograms,thewarehouseavailability(fillrate)isoftenused.

1.VMIKPI:Inventorylevel

Inventoryefficiency isoftenmeasuredby inventory turnover(ITO). ITO isaratioshowinghowmanytimesa

company'sinventoryissoldandreplacedoveraperiod.TheInventoryTurnoveriscalculatedas

The higher the inventory turnover, the fresher the products and the lower the current inventory. Fresher

products mean fewer discounts and fewer writeoffs because of obsolescence. Lower inventories mean less

capital invested into stock and therefore significant savings in cost of capital. Higher turnover and lower

inventoriesalsomeanpotentialtowidentheassortmentandearnmorerevenues.

Daysofsupply(DOS)couldbecalculatedbyinvertingtheinventoryturnoverfigureandadjustingforunitsof

measure.Forexample,aturnoverof30(thirtytimesperyear)wouldbeequivalenttoatimesupplyof1/30

yearor365/30=12daysofsupply.However,theturnoverratioisbasedonthecostofsalesforthepastperiod

and on the average inventory investment in euros. Aggregate euros and a historical view are not useful to

operations,which

needs

to

match

supply

and

demand

of

specific

items

in

the

future.

Thus,itismoreusefultocalculateDaysofSupplyonitemlevelusingunits,ratherthanmoney:

InventoryturnoverITO= CostofGoodsSold

Average

Inventory


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27

*Basedonhistory,inmoreadvancedcasesconsideringalsoforecasteddemand

Generally,smaller

days

of

supply

figures

are

indicative

of

aleaner,

more

efficient

inventory

usage,

but

this

can

becarriedtoofar.Fragilesystemshavecrashedbecauseofalackofsupply,sothetargetvaluesshouldbeset

carefully.

2.VMIKPI:Availability

Availabilityisthemeasureofaproductbeingavailableforsaletoashopper,intheplaceheexpectsitandat

thetimehewantstobuyit.Therearedifferentlevelsofavailability:

OnShelfAvailability(OSA).Thisisthemeasurewhichshowsthattheitemisonthestoreshelf.This

measureisusedindirecttostoreVMIprograms.

WarehouseAvailability.Theproductisavailabletoorderfromcentralwarehousetostores.Thisisthe

mostoftenusedmeasureincentralwarehouseVMIprograms.Asynonumusedinindustryisfillrate.

It isalsowisetodistinguishbetweenProductAvailability(measuredbyproductfillratewhetheraproduct

can be supplied from (store) inventory) and Order Availability (measured by order fill ratewhether all

productsintheorder(shoppingbasket)canbesuppliedfromthe(store)inventory).

An Out of Stock (OOS) event occurs when, for some continuous

time, an item is not available for sale as intended. If the retailer

intendsanitemtobeforsale,butthereisnophysicalpresenceofa

saleableunitontheshelf,thentheitemisdeemedtobeOOS.The

OOSeventbeginswhenthefinalsaleableunitofaSKUisremoved

from

the

shelf

and

it

ends

when

the

presence

of

a

saleable

unit

on

theshelfisreplenished1.

TherearealsovariousOOSratescalculatedinindustry,referringtostatisticaldescriptionsofcollectionsofOOS

eventsexpressedasanOOSrate.Theseattributesinclude:1)numberofoccurrencesovertime,2)numberof

simultaneous occurrences, 3) duration, 4) shelf availability, 5) lost unit sales, 6) lost monetary sales, and 7)

numberofcustomersimpacted.

However,oftentheOOSisnotmeasured,asthisisconsideredexpensive.Thetraditionalmethodistoperform

amanualauditofthestoreandmanuallylookforgapsontheshelves.Asecondmethodmakesuseofpoint

ofsale(POS)dataor,morespecifically,scannerdata.Baseduponhistoricalsalesdata,analgorithmisapplied

to sales patterns to determine whether an item is on the shelf. There are many practical paperswritten on

bothOSAandOOSreduction,forexample,anECRWhitepaper4aswellastheP&Gfundedstudy5.

SettingcommongoalsfortheVMIprojectusingKPIs

It is beneficial to agree oncommon target values of KPIs to be achieved by switching to VMI. There can be

many performance indicators that could have agreed target values, but it is useful to include at least one

inventoryturnovermeasureandoneavailabilitymeasure(seedefinitionsabove).ThetargetvaluesofKPIscan

beverymotivating,especially iftheyareagreed inwrittenform,preferably inVMIcontractbetweenvendor

andbuyer.

4Gerhard

Hausruckinger

Approaches

to

measuring

on

shelf

availability

at

the

point

of

sale

Roland

Berger

Strategy

Consultants,ECREurope,2006,http://ecrall.org/files/OSAMeasurementWhitePaperfinal_E1.pdf5ThomasW.Gruen,DanielCorsten,AComprehensiveGuideToRetailOutofStockReductionIntheFastMovingConsumer

GoodsIndustry,2007,http://www.nacds.org/pdfs/membership/out_of_stock.pdf

DaysofSupplyDOS= Inventoryathandinunits

Averagesalesperday*

Theglobalaverageofretailout

ofstocks(OOS)is8.3%atstore

level1,leadingtoanestimated

lossoftotalrevenueof4%.


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28

2.4.2. VMIContractbetweenvendorandretailer

VMIrelationshipisestablishedusuallybetweenpartnerswhohavebeendoingbusinessforsometimealready.

This means that there already exists a trade contract covering terms and conditions of business, possibly a

qualityagreementandothersupplementingagreements.WhenVMI is implemented, it isnecessarytoeither

replacetheexistingcontractorproduceacomprehensiveVMIappendixtothecurrentcontract.

In the VMI agreement, common goals can be agreed, as well as responsibilities and rights clearly allocated.

BothpartiesmustbeawarethatorganisationalandITadjustmentsarerequiredinordertoimplementthenew

purchasingmethod.AsVMIagreementsareprivatecontracts,theyarenotregulatedbyanylegalcodenor is

thereanycodifiedstructuretoconformto.ThereisusefulacademicresearchaboutstandardVMIagreements,

the most notable by Zammori et al (2009)6. While their work focused mainly on suppliermanufacturer

consignmentVMI,itisstillusefulwithmodifications.

Based on research and practice, the topics to be covered in VMI contract can be divided into six major

chapters:

1. Objectiveandtermsofagreement

2. Servicelevelagreement(SLA),includingKPIs

3. Agreedassortment

and

promotions

4. Deliveryterms

5. Informationexchange

6. Miscellaneous

ExplanationofVMIcontractchapters

1. Objective and terms of agreement. In first chapter, the scope of the agreement (Vendor Managed

Inventory)andthewillingnessofbothpartiestoundertakearelationshipbasedontrustisunderlined.

Theserviceperformedbythesupplierandtheinformationreleasedbythecustomertosupportitare

defined.Additionally,thestartanddurationoftheagreementisspecified.

2. Service

Level

Agreement

(SLA).

In

this

chapter,

goals

of

the

VMI

project

are

specified

in

terms

of

target values for specific performance metrics (KPIs). KPIs shall be tied in with penalties and/or

benefitsandpartiesmustdefinethecontrollingsystem.Handlingofservicelevelproblems,especially

outofstocksituations,iscovered.

Zammori:TheSLA isacharacteristicsectionofanylogisticagreement(i.e.performancebasedagreement)

wherethecustomerandthesuppliercommitthemselvestoattainapredeterminedlevelofperformance.

Thispartdefinestheservicewhichisexpectedtobesuppliedbyboththecustomerandthesupplierand

includesalistofkeyperformanceindicators(KPIs)usedtoquantifyandtoassesstheachievedlevelof

performance.Forthisreason,KPIshavebeentiedinwithpenaltiesand/orbenefits,inordertodefine

congruentbonusmalusincentivesystem.Furthermore,achapterhasbeenincludedwhichgivesthe

possibilityofmakingperiodicinspectionstocheckthepreservationoftheoperatingconditionsand/orof

thequalitystandardsdefinedintheagreement.

3. Agreed assortment and promotions. Third chapter covers the frequency of assortment reviews,

describeshandlingofchangesinassortmentsandspecifiespromotionshandling.

4. Delivery terms. In fourth chapter, delivery slots are defined. Delivery information exchange,

emergencydeliveries,handlingofproblems,andlabellingstandardscovered.

5. Informationexchange.Inthischapter,theEDIchannelsaswellasbackupstrategydescribed.AllEDI

messages are listed with their content, sender and frequency. Productmaster data attributes listed

andexplained.NecessaryinformationgivenaboutVMIlocations(warehouses,shops)

6Zammori,Franceso,Braglia,MarcelloandFrosolini,Marco2009.AStandardAgreementforVendorManagedInventory.

StrategicOutsourcing:AnInternationalJournal.Vol.2,no.2.pp.165186.


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6. Miscellaneous.Inthelastchapter,mostimportantisthelistofcontactsforimportantteammembers

on both sides. Other important legal considerations are covered here: confidentiality, terms of

terminationofcontractandsolvingofdisputes.

Itisimportanttostudyexistingcontractsindetailpriortosigningtheagreementandforthepartiestodiscuss

allaspects.Consensusisrequiredonthemostimportantpointstoavoidenteringintoadditionalobligationsvia

the

VMI

agreement.

If

the

wording

of

the

same

contractual

points

differs

in

the

various

agreements,

it

is

advisabletoadjustthesepointsinthenewagreementtobesigned,orexpresslystipulatethisinanadditional

agreementtotheVMIcontract.Thisprocedureprovidesclarityintermsofthelegalbasisandhelpstofocuson

theamountofdebtanddamages intheeventofadispute. Inparticular,howtohandleexceptionsandsolve

problemsinthenewcollaborationshouldbecovered.

AcomprehensivesampleVMIcontractcanbefoundinAppendixX.

Pointstoconsider(notinsamplecontractcurrently)

VMItrainings

pointof

transfer

of

ownership

reliabilityandsharedrisk

transferofservicestoathirdpartyprovider(e.g.,transportationbyalogisticsserviceprovider)

Numberofweeksofforecastdemandusedforplanningreplenishmentlevels

Financialaspectsofrelationship(setupcostssharing,penalties/bonusesifany)

2.5.

Align

IT

and

business

2.5.1. Internalandexternalbusinessprocesschanges

Whenproductrange forVMI identified,volumesanddeliveryschedulesdetermined, internalprocessshould

bereviewedandmodifiedtosupportthenewreplenishmentstrategy.Itisadvisableto:

Share experiences with other vendors and business partners who have implemented the vendor

managedinventorymodel.

Describetargetprocessesanddevelopaprocessstructurewhichmeetsfuturerequirements.

IdentifytherequiredprocesschangesandITinvestmentsinhardware/software.

AretailerimplementingVMIwillseethatmanyprocesseshavetobechanged. ThereisaresearchbyReitner

etal.(2012)describingthosechangesindetail.Hereweshowasimplifiedversionoftheirwork.


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Table8.VMIimpactonretailerprocurementprocesses.

(needstobereviewed.Perhapsasimilartableforsuppliersadded)

2.5.2. VMIprocessandEDIdocuments

AprerequisitefortheefficientapplicationofECRprocessmodels istheuseof

the globally defined GS1 standards, which offer a basis for the electronic

interchangeofdatabetweensupplychainpartners.

Also, Electronic Data Interchange (EDI) is a prerequisite for succesful VMI

projects.Fortradedocuments,

there are globally many

standards. ECR Europe

suggests to adopt GS1

EANCOM

standards

for

trade

documents. However, even if

your trade partner uses a

different standard, it should

not be an obstacle. Most

companies are using EDI operators for connectivity, and conversion of

documentformatsisusuallypartofEDIoperatorsserviceoffering.

Table9liststhevariousmessagesusedinVMI,specifieswhethertheyareoptionalormandatoryandalsothe

frequency of transfer. The frequency of EDI document exchange differs for VMI DC (Vendor to Distribution

Center) and VMI DSD (Vendor Direct Store Delivery). All messages have been explained in more detail in

Appendix3.DescriptionofEDImessagesusedinVMI.

Table9.EDImessagesusedinVMIandtheirfrequency

Message Description DCDelivery DSDDelivery

INVRPT InventoryReport daily atleastmonthly*

SLSRPT Salesreport weeklyormonthly daily

ORDER Order optional** optional

DESADV Despatchadvice withSSCCreference whendeliveryoccurs(daily,

weeklyetc.)

RECADV Receiptadvice recommended recommended

INVOIC Invoice withORDERreference withORDERorRECADV

reference,whenagreed

ElectronicDataInterchange(EDI)

isthecomputertocomputer

exchangeoftradedocumentsina

standardelectronic

format

betweenERPsystemsoftrade

partners.

GS1standardscreatea

commonfoundationfor

businessbyuniquely

identifying,accurately

capturingandautomatically

sharingvitalinformation

aboutproducts,locations,

assetsandmore.GS1

identificationstandards

include:

tradeitem(GTIN)

logisticsunit(SSCC)

physicallocation(GLN)

document(GTDI)

asset(GIAI)


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*andalwayswhenstockhasbeentaken**sometimesmandatory,asretailersITsystemrequiresopeninganorderlineinitssystem

CompaniesusingSAPoftenexploitmessage typePROACT (ProductActivity). Thismessagecombines INVRPT

andSLSRPTmessagesand isthereforewellsuitedforVMIneeds.ThefrequencyofexchangeinFMCGshould

beoneday.

Notall

of

listed

message

types

are

required

for

successful

VMI.

For

the

DC

VMI

process,

the

daily

inventory

report (or product activity report) is mandatory. It must indicate additions to stock, usage, goods in transit,

current stock level (date and time) and retailer orders outstanding. Other message types facilitate the

automatedreplenishmentprocess.

EDImessagesandVMIprocess

TheprocessofVMI iscomparedonFigure18tothoseoftraditional(BuyerManaged inventory,BMI)andto

ComanagedInventory(CMI).DependingonmodelchosenVMIorCMI,theprocessandEDIdocumentsused

differssomewhat.InbothVMIandCMIcases,thebuyerforwardssalesandinventorydatatoVendor,whowill

analysethedataandmakeadecisionforreplenishment.

Figure18.ProcessofreplenishmentincaseofBMI,VMIandCMI

1.

BuyerManaged Inventory (BMI). Intraditionalproductreplenishmentprocess, thebuyercalculates

andsendsorder(ORDER)tovendor.Vendorpreparestheorderandshipsit.Withthegoods,despatch

advice (DECADV) document is sent. The buyer accepts the goods with a receipt advice (RECADV)

document.Inidealcase,theinvoiceisbasedonreceivedquantitiessothattheprocessingofinvoiceis

reallyfast.

2.

Vendor

Managed

Inventory

(VMI).

This

revolutionary

concept

turns

the

ordering

process

upsidedown. Thebuyer does notneed toorderanymore, the right andresponsibility is shifted tovendor.

Buyer sends regularly sales and inventory data (SLSRPT and INVRPT). Sometimes those two are


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combined into product activity report (PROACT), especially widespread with SAP users. Vendor

calculates the order based on sales and inventory data, and agreed Min/Max levels, prepares the

orderandships it.Therestoftheprocess issimilartoBMI, ie, in idealcase,therearebothDESADV

and RECADV documents in use, enabling invoices to reflect actually accepted quantities to make

invoiceprocessingefficient.

3.

Co

managed

Inventory

(CMI).

Co

managed

inventory

is

in

between

BMI

and

VMI.

It

is

often

used

in

caseswherebuyer isnotreadytogiveoverthecontrolofreplenishmenttovendor. Insteadof fully

decidingreplenishment,vendorscreateorderproposals(ORDERPROPOSAL)anddonotstartpicking

theorderswithoutwaitingfortheconfirmationfromthebuyer(informofVMIORDER). Therestof

theprocess,onceagain,isthesameasinBMIandVMI.

Insome countries (eg, Switzerland) there is apractice whereproducts in regular assortment arecoveredby

VMIprocess (asdescribedonFigure18)andpromotionalproductsbyCMIprocess (onthesame figure).For

promotionalproducts,thevendorsendsanorderproposal.Basedonthatproposal,thebuyersendstheVMI

orderwiththeexactquantitiesandrespecteddeliverydays.Basedonthisorder,productionisscheduledand

latertheshipmentswillbecombinedwithregularproductsshipments.

AgreeonEDIcommunication

The foundation of a successful VMI program is automated connectivity with your trading partners. The

technological interfacemustbediscussedwithyourtradepartnersandagreed. InVMIcontract(seemore in

chapter2.5),EDIdocuments(andtheirformat)used,transferchannelsandprotocolsmustbespecified(unless

the latter twoarealreadyspecified ingeneral tradeagreementwith thepartner). IncaseanEDIoperator is

used,thisshouldalsobeagreed inthecontract.Theconnectivity iscriticalforenablingpartnercollaboration

andforprovidingthevisibilityneededtomonitorVMIprogramoperationsandresults.

Documentnumberingagreements

Using VMI, orders will no longer originate in buyers system but in suppliers system. This might create a

challenge for the buyer, because corresponding numbers must be set up in its own system for the order

(ORDERS).Itisrecommendedthatspecifically definednumberseriesareusedforthispurpose.

Wherethisisnotpossible,theretailermustgeneratehisownordernumbersonthebasisofareferencetable

andentertheseseparatelyinthereferencetable.RetailerswhoimplementaVMIrelationshipforthefirsttime

arestronglyadvisedtoallocatesufficientresourcestosolvingthisparticularissue.

Toensureasmoothprocess,itisimportantthattheorderisenteredintheretailerswarehousemanagement

system as early as possible. This guarantees that all parties involved in the process are aware of the next

delivery,especiallyinthecaseofoutofstocksituations.

2.5.3. VMItechnologicalsolution

InordertosetupandmaintainaneffectiveVMIprogram,companiesshouldinvestinasupplychainsolution

thatoffers visibility and control across all supply chain links. A good VMIsolution shouldhave the following

features(seeFigure19):


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Figure19.FunctionalityofVMItechnologicalsolution

1. Provide inventory visibility. Enable retailers to share both sales and demand data (forecasts) with

suppliers. Provide near realtime inventory visibility across warehouses, shops, hubs, suppliers, and in

transitinventories.

2. Enable automatic replenishment. Calculate stock balances and create automatic replenishment orders,

takingintoaccounttheagreedMin/Maxlevelsanddeliveryfrequencies.

3. Provideaudittrails.Provideaudittrailsforvisibilityintotransactionhistoryforliabilitymanagementand

disputeresolution.

4. Offerconnectivity (EDI).Offerconnectivityoptionsthatallowpartnerstocommunicatewithmajorityof

theirpartnersfromsophisticatedmultinationalcompaniestosmallenterprises.

5. Monitor and report. Provide exceptionbased configurable alerts, so that all parties are notified of

potential inventory problems. Offer monitoring logs and analytical reports that give an overview of the

inventorymanagement

process.

When choosing a VMI technological solution, there are two options: 1) Integrated VMI/ERP Solution or 2)

StandaloneVMISolution.

Figure20.Positiveandnegativeaspectsofchoosing andintegratedVMIsolution

The integrated VMI/ERP solution has an automated replenishment functionality module that can handle

multipleinventorylocations.OrderprocessinginwarehousemanagementispartoftheERPsystemanddoes

notrequireadditionalinterfaces.TheprosandconsoftheintegratedsolutionarelistedonFigure20.

ThestandaloneVMIsolutionisrecommendedwhentheERPsolutionhasnoautomatedreplenishment

functionsorcannothandlemultiplestocklocations.Therequiredfunctionalityinthatcaseisdeliveredina

standalone

solution.

Order

processing

is

via

interfaces

to

the

ERP

system

and

independent

of

warehouse

management.Theprosandconsoftheintegratedsolutionarelistedon

Changestomasterdataareimmediately

availableforVMIfunctions.

Shorttermsalesfluctuationsare

immediatelyevidentfordemandplanning.

Noseparate

system;

key

users

and

other

usersusethesamesystemforwarehouse

managementandorderprocessing.

Initiallysettingupanewprocessisvery

timeconsuming.

Alongprojectleadtimeisrequiredfor

discussinganymissingandadditional

functionswith

central

IT

teams

in

advance

andinstallingthem.

Higherinitialinvestmentrequired.

INTEGRATEDVMISOLUTION POSITIVEASPECTS NEGATIVEASPECTS


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Figure21.

Figure21.PositiveandnegativeaspectsofchoosingastandaloneVMIsolution

The standalone option can be a pragmatic initial approach, followed by a subsequent switch to integrated

solution.More

issues

to

consider:

Frequencyofassortmentchanges.Ifproductrangesaresubjecttoseasonalchanges(e.g.clothing)or

productsarequicklyreplacedbynewproducts(e.g.computerindustry),anintegratedversionismore

advantageous.

S&OPstructure/integrateddemandplanning.Iftheorganisationisgearedtotightstockmanagement,

it ismandatoryfortheVMIsolutiontobedirectly linkedtothepurchasingorproductionsystem,as

thiswillfacilitateaswiftresponsetoincreaseddemandorsluggishsales.

E2Open: Standalone solutionproviders typically have extensive experience enabling B2B connectivity with

suppliers,andareabletoprovide the relevanttrainingand technologiesneeded togetthemupandrunning

quickly.Asa result, theoverallsolution is lessexpensive to implementandmaintainforbothcompaniesand

their partners. Finally, ondemand solutions allow your organization to shift focus to intercompany

collaboration(acornerstoneofeffectiveVMI)andawayfromprocuring,installing,andmaintaininghardwareandsoftwaresystemsinternally.

2.5.4. SetupandtesttheVMIsolution

The VMI solution should be set up by the VMI project team: representatives from sales and logistics and

togetherwith

the

later

key

users.

Actual

implementation

(technological

realisation)

can

be

completed

in

about

onemonth.

PlantheVMIsolutionsetupintwophases:

1. Test phase provides the opportunity for project members to learn how to handle the new system

parametersforindividualitems.

2. Afterthislearningphase,allitemscanthenbeenteredonthesystemfortheliveenvironment.

Developdatahistory

Uploadatleast12weeksofdatatothemanagementtool.

ManuallysupplementmissingweeksandOOSsituationsinthemanagementtool.

Highlightpromotionalproductsseparately.

TherearemanyVMItoolsproviderstochoosefrom,seeAppendix

Simple,triedandtestedVMItoolscanbe

used(providersarelistedinAppendixII).

Centralisedsupportbythetoolprovider

Favourablelicenceagreement

Toolwillbefurtherdevelopedbythe

provider.Releasecapabilityisguaranteed.

Changesto

master

data

must

be

made

manually/orweeklyuploaded

Shorttermchangesinsalesarenot

automaticallyreflectedinthegeneral

demandplanning.Hence,thereisneedto

exchangedemandfluctuationperiodically

withthefactoryplannerorwiththerelevant

KeyAccountManager.

STANDALONEVMISOLUTION POSITIVEASPECTS NEGATIVEASPECTS


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MapEDImessages,setupEDIconnection

First,makesureyouhaveagreedbothonproductmasterdata

(Min/Max levels, ordering and delivery units) and its

communication(channels,frequency)withyourpartner.

Next, the individual EDI message types must be mapped and

tested.

Many

retailers

have

described

their

VMI

process

in

detail(forexample,seefigurex),thisshouldbeadaptedtothe

companyspecificrequirements.

Backup:Defineanddescribethebackupprocesses.

Finally,thebackupprocessisdocumentedasaprecautionincasetheEDIcommunicationbetweenvendorand

retailer should fail for several days. In this case, the minimum precautionary measure is for stock from the

retailerswarehousetobetransferredtothevendor,forexampleinanExcelfilesentbyemail.Thismakesit

possibleforthevendortocorrectstocklevelsmanually,generatetherelevantorderproposalsandtriggerthe

dailyreplenishmentprocessestopreventanOOSfromoccurringintheretailerswarehouse.

Testing

The VMI system needs to be tested prior to reallife deploy. Sometimes test environments for VMI are

availableinERPsystems(e.g.,SAP).Itisrecommendedthatthelast12weeksofhistorybebuiltuponthebasis

oftheinventoryreport.Thismeansthatvariousaspectsofthenewprocessesaretestedandatthesametime,

anyerrors(e.g.inEDImapping,masterdataortransmissionofincorrectstocklevels)areeliminatedbetween

theparties. Figure22showsasampletestplanforVMIsetup.

Figure22.SampletestplanforVMIsetup

On Figure 22, first test activities, then system availability and tester availability is described. Test activities

includepreparation(determinetestcase,maketestdataavailableandpreparetestscript)andactualtesting.

Carryingoutthetestincludesalsoevalutaionandcorrectionoferrors.Theteststepsare:

Test interface(transferinventoryreport,salesreport,invoices)

Testhistory

Isthehistorybuiltupcorrectlybasedontheinventoryreport?

Thespecificationoftheinformation

exchange:

1.

whichEDIdocuments,

2. whichformats,

3.

whichchannel,

4.

frequency

shouldbeagreedbetweenpartiesin

theirVMIcontract(seechapterY).


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Arestockoutsprocessedaccordingtothesystemsettings

Whathappenswhenquantitiesoninventoryreportarenotreportedinwholenumber?

(onesuggestionistoroundthosedowntonearestinteger)

Testordering/invoicing

Aretheorderproposalscalculatedsensibly?

Does

the

order

proposal

comply

with

the

system

settings

defined

(FTL

or

only

full

pallets)?

Areonlyitemsactuallydeliveredinvoiced?

System and personnel resources availability is shown on the same picture for better overview. Planned

acceptancedatesarecoloredingreenandmarkedwithOK.

2.6.Rollout:PilotandOnboardPartners

2.6.1. PilotyourVMIprogram

ChoosingthecorrectVMIpilotpartnerisofbigimportanceforthesuccessoftheproject.Incaseitgoeswell,

you can use it as a success story to convince your other trade partners to switch to VMI as well. The best

salesargumentisawellworkingpartnership.

Before choosing your pilot VMI partner, you have already sorted all your suppliers into VMIsuitable and

nonVMI suitable suppliers. The main criteria are listed in chapter 2.3.1. Criteria include both the product

range a specific supplier is providing as well as on specifics of the supplier as a company. Additionally, the

relationshipbetweenthecompanies isvery important.Notonlythevolumeoftrade,butalsothequalityof

therelationship.

One

of

the

prerequisites

for

successful

VMI

projects

is

trust.

Besides suitable product range and existing trustful relationship, it is also important to consider technical

questions.Doesyourbusinesspartnerhavetherightskillsandtechnicalbasetoimplementneededchangesto

processes?

Implementation of VMI assumes that both partners have the basic skills relating to and Master Data

Management(readmoreinchapter2.3.4)andElectronicDataInterchange(readmorein2.5.2).Incasethose

skillsaremissing,itisimportantthatthepartnerswillemploythemassoonaspossible.

Coupleofparagraphsmoreneededhere


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2.6.2. Trainandgolive

InvolveKeyUsersandTrain

Afterthetestshavesuccessfullybeencompleted,thekeyusershouldbeinchargeoffurtherimplementation.

Thekey

user

will

then

make

every

effort

to

ensure

that

all

errors

are

eliminated

before

going

live

and

that

the

processes work. It is recommended that the key user and the other users write the user documentation

themselvesandareactivelyinvolvedinthetechnicalacceptanceofthesystem.

This istheonlywaytoensure thattheyacceptthenewmanagementmethodandareproudtotakeonthis

newresponsibility.Aftercompletionof thisphase, thekeyuser is thepersonwhoknowsallsystemsettings

and understands what information is reflected by the relevant mapping. It is high time to celebrate the

achievementstogetherwiththepartner!

Involvementofpeopleandusertraining.ImplementingVMIisacompanywideefforttoredesignandintensify

business processes with supporting technology. Therefore, everyone should be involved and driven by the

same objectives to make this big change in the company (and in the supply chain) successfully work. By

involving key people in the VMI implementation process, employees are given the opportunity to make a

significant

contribution,

and

to

see

the

value

of

VMI

as

the

supply

chain

becomes

transparent.

More

importantly,employeesaremorelikelytounderstandtheirrolesanddevelophighsenseoftaskidentification

(Kuk,2004).

Due to changes in processes, employees need to be trained to be able to act on very different level and in

different context. Purchase people no more need to make orders; instead, they start to interact with their

suppliersonamoremeaningful level,andplan the inventoryandpromotions thatreallydrive thesalesand

business. On supplier side, instead of simple order handling, people now need to obtain the skills of data

analysistobeabletomakerightdecisionsforreplenishment.

Goinglive

The date on which the system goes live must be coordinated with sales and marketing at an early stage to

ensurethat

no

above

average

level

of

activities

is

expected

or

product

range

changes

are

scheduled

on

that

date. If a consignment warehouse is installed at the same time as the VMI is implemented, the accounting

departmentmustalsobeinvolved.Thetakingoverofstockimpactsliquidityandmustthereforebeincludedin

thefinancialplanningasanonrecurringfactor.

In golive phase, good project management is necessary for the switch to work without major delivery

disruption.Adailybriefconferencecallwillensurethatsufficientfocusisplacedontheimplementation andall

participants(andpartiesaffected)areinformedaboutprojectprogress.Thefollowingpreparationsbeforethe

goinglivedateshouldbedone:

Oldstockisliquidatedandthereisaformalprotocolregardingthestockwhichwillbemanagedbythe

vendor

from

Best Practices of VMI

Documents

Transcript of Best Practices of VMI