Crp & vmi

  • Published on

  • View

  • Download

Embed Size (px)


<ul><li> 1. Continuous Replenishment Program &amp; Vendor Managed Inventory</li></ul><p> 2. Table of ContentsCRP and VMI: Focus on Efficient Replenishment of Products3VMI Background and Objectives4 A CRP and VMI Model 5The Technology Backbone of CRP and VMI 6How Movex Supports VMI 7 Benefits8Drawbacks9 Conclusions: The Future of VMI 10 2 3. CRP and VMI: Focus on Efficient Replenishment of ProductsIn response to the current use of supply chain buzzwords, this document aims to explain the concepts ofContinuous Replenishment Program (CRP) and Vendor Managed Inventory (VMI). It also describes howIntentias e-collaboration application Movex supports VMI. Finally, we present both the expected benefits anddrawbacks when implementing these initiatives.CRP is an efficient replenishment concept within the Efficient Consumer Response (ECR) arena. It focus-es on improving the flow of products in the supply chain, both forward to the customer and eventually theend consumer, and backward to the supplier.The goals of CRP are to: Increase inventory turns Reduce inventory levels Decrease stockouts Improve customer service levels Boost warehouse efficiency Enhance your trading partners perception of value.Demand ManagementEnablers Demand Strategy &amp; Capabilities Common Data &amp;CommunicationStandardsOptimize Assortments Optimize Promotions Cost/ProfitOptimize NewConsumer Value and ValueProduct IntroductionsCreation Measurement Supply ManagementIntegratorsSupply Strategy &amp; CapabilitiesCollaborativePlanning, Forecasting Integratedand Replenishment Responsive Operational Demand Driven E-BusinessReplenishment Excellence Supply Business-to-BusinessFigure 1. ECR focus areasEfficient Consumer Response (ECR), Quick Response (QR),Vendor Managed Inventory (VMI) and other sim-ilar efforts have had a great impact on todays latest trends, such as Collaborative Planning, Forecasting andReplenishment (CPFR). VMI should be viewed as a stepping stone towards a collaboration process or partof such a process. Its scope is not as wide as the scope of CPFR, but in many situations VMI alone is foundto be an extremely efficient method of controlling the supply chain. 3 4. VMI Background and ObjectivesA term widely used when implementing CRP, Vendor Managed Inventory (VMI) is an arrangement wherethe supplier, not the customer, decides when and how much of the customers stock is replenished. It is a wayto cut costs and keep inventory levels low throughout the supply chain. VMI focuses on assuring that prod-ucts are replenished to stock in the most efficient way, without manual information such as orders having tobe transferred between customer and supplier. Instead, automatic electronic messages are used to keep trackof the current stock situation and planned sales forecasts, so you can determine when it is time to refill thestock and avoid stockouts. VMI initiatives emerged in the late 1980s when department stores such as Wal-Mart moved to auto-mated VMI.The apparel industry has continued to be a pioneer in VMI ever since. Ironically, industries facingcomplex situations have been among the last to adopt automated VMI. For example, supermarkets have typ-ically taken longer than department stores to implement VMI.The sheer number of items in consumers shop-ping carts and on the supermarket shelvesoften more than 25,000 in one storehave meant greater com-plexity in tracking and using sales data. VMI automation at its peak can be seen in industries such as auto-motive and paper manufacturing. The objectives of VMI are to: Increase in-stock inventory Increase sales Improve customer service Increase gross margins Reduce overall inventory in the supply chain Stabilize vendors production.Another interesting issue that is part of the VMI process is whether the cus-tomer should be invoiced directly at shipment or after selling the productsto their own end customers. This concept is called consignment stock. Bydefinition, consignment stock is a marketing arrangement whereby physicalcontrol of merchandise, but not title, is transferred from one business (theconsignor) to another (the consignee). As consignee, the title to the goodsremains with the consignor until the goods are sold. As a result, consignment stock may not be shown as an asset in the consignees books. 4 5. A CRP and VMI ModelIn the example that follows, it is assumed that the vendor (supplier) manages the inventory level and avail-ability at the distributors (customers) warehouse, based on forecasted demand and current stock level infor-mation sent from the distributor.From the suppliers perspective, a VMI model generally entails:1. Receiving stock levels from a customer2. Receiving sales forecasts from a customer3. Generating replenishment orders when needed4. Sending dispatch advice to a customer5. Receiving sales reports from a customer6. Sending invoices to a customer.In the first step, the supplier receives up-to-date information on product availability, mainly electronicallythrough Electronic Data Interchange (EDI). However, the supplier also needs a near-future sales forecast ofproducts to predict when and how much to refill in stock. After this, the supplier creates a planned replen-ishment order for the customer. The entire concept of VMI is based on the supplier generating the replen-ishment order, not the customer. When the time comes to deliver the products, dispatch advice is sent, mainly electronically, from the sup-plier to the customer. The customer can then prepare to receive the products. After this, normal deliverytakes place and the inventory balance is updated. What happens next is mainly determined by the agreement between the supplier and customer. Forexample, a consignment agreement can state that the supplier will not be paid until the customer has soldor used the products. In that case, the customer sends a sales report back after using the products, whichtriggers the invoicing process for the supplier. The other alternative is to invoice the customer directly atshipment. As in many other cases where the supplier and buyer must collaborate, the rules and working guidelinesmust be clearly stated and agreed upon in advance for the relationship to work. One of these rules is defi-nitely the payment rule.5 6. The Technology Backbone of CRP and VMI For many suppliers, producers, distributors and retailers worldwide, EDI has become the backbone for com- puterized business-to-business communication. Meanwhile, the use of the Internet has exploded and new technologies, such as eXtensible Markup Language (XML), have recently surfaced. Many people are concerned that the benefits of electronic commerce standards such as EDI will be swept away by the excitement of the Internet. However, we believe that it is not realistic that EDI will be replaced by the new technologies overnight. It will probably be a gradual process, where XML is used fur- ther back down the supply chain, possibly with second- or third-tier suppliers, where EDI has been too com- plex and expensive to implement. Or, XML might be used when real worldwide standards are available to enable the new technologies to provide more flexible and responsive communication between the parties. The most widely used technology in VMI is still EDI. Typically, the manufacturer reviews inventory stock balances daily by receiving EDI files from the distributor or retailer.The manufacturer then uses the invento- ry information along with other known information, such as sales forecasts and promotional activities, to cal- culate and create an anticipated replenishment order for the customer. After receiving an electronic acknowl- edgment of the planned replenishment, the manufacturer ships the order. When the product is received at the customer site, payment is made with an electronic funds transfer from the customers bank. Another common scenario is that the customer receives an invoice only after sending a sales report EDI message to the manufacturer. In the CRP-VMI process, these EDI messages can usually be seen: Inventory report Sales forecast Order response Dispatch advice Sales report Invoice.6 7. How Movex Supports VMIIn Movex, the VMI scenario can be processed using key standard functionality, such as forecasting, customerordering, distribution (replenishment) ordering, picking and financials.Figure 2 describes a VMI model in Movex. The model assumes that the customers warehouse is speci-fied as a warehouse in Movex. The current balance in the customers stock is received regularly and updat-ed in the Movex warehouse files.This information is later used when running distribution requirements plan-ning (DRP) program in order to decide when to refill stock. 1Sales forecast from customer 6 Issue/sales fromor generated customer warehouseDelivery plan in Movex 2 Preliminary CO created Actual CO overrule7 Actual COfrom delivery plan preliminary CO 8Record in ARPlanning Current balance,planned shipments 3 DO proposal 4 Actual DO 5 Print picking listFigure 2.The Movex VMI flowIn step 1, a sales forecast from the customer is received.This information is then used to create the deliveryplan, which shows planned deliveries to the customer. From the delivery plan, a preliminary customer orderis created (step 2).This order is later converted into an actual order that is used as the basis for invoicing thedistributor. After the DRP run, Movex creates a distribution order proposal (step 3), in this case, a replenishmentbetween the manufacturers warehouse and the distributors warehouse. At the same time, an orderresponse can be sent to the distributor. When the distributor confirms the replenishment, the distributionproposal becomes firmed planned. In other words, it becomes an actual distribution order (step 4). In step 5, the picking list is printed, and the products are picked, packed and shipped to the distributor.Dispatch advice can be sent to the distributor as a notification of the shipment. When the distributor has sold the products, a sales report message is often sent to the manufacturer(step 6). An actual customer order is created (step 7), which precedes the previously created preliminary cus-tomer order. Finally, a record is created in the accounts receivable program (step 8). 7 8. BenefitsA traditional answer to addressing customer service problems has often been to increase inventories. If inven-tory is in the pipeline, including the stores, then consumers will never have to face products being out ofstock. Unfortunately, inventory bears a high cost in terms of capital consumption and expense. Also, in thefood and beverage industry, higher stock cannot be the solution, since issues such as shelf life and promo-tions make it impossible to simply increase inventory.One main goal of continuous replenishment programs like VMI is to keep stock levels at a minimumthroughout the supply chain.VMI benefits suppliers and customers (or distributors and retailers) alike. Someof VMIs many benefits are listed below.Supplier benefits: Visibility to the customers point-of-sale data simplifies forecasting. Promotions can be more easily incorporated into the inventory plan. Customer ordering errors, which in the past would often lead to a return, are reduced. Stock level visibility helps identify priorities (replenish stock versus a stockout). The supplier can see the potential need for an item before the item is ordered.Customer benefits: Fill rates from the supplier, and to the end consumer, improve. Stockouts and inventory levels often decrease. Planning and ordering costs decrease since the responsibility is shifted to the supplier. The overall service level is improved by having the right product at the right time. The supplier is more focused than ever on providing superior service.Dual benefits: Data entry errors are reduced due to computer-to-computer communications. Overall processing speed is improved. Both parties strive to offer better service to the end consumer. All parties involved benefit when the cor- rect item is in stock when the end consumer needs it. A true collaborative partnership is formed between the supplier and the customer. (Source: Long-term benefits include more efficient promotion handling, improved product introductions, more effi- cient product distribution and an eventual increase in sales. 8 9. DrawbacksVMIcalled Very Mixed Impact by somehas its drawbacks when not implemented properly. Some possibledrawbacks of VMI might include: EDI problems Employee acceptance Trust among supply chain partners.EDI sometimes creates a challenge due to the many different standards in use.This makes it difficult to com-municate and translate information between companies. If manufacturers are to assume stockkeeping respon-sibility, they must be able to communicate in real time with their (retail) partners in a uniform way. With VMI, all employees involved in the process must fully understand and accept this new way of doingbusiness. Its not enough to simply sell the concept to senior management. All employees who are involvedmust be willing participants. VMI can also fail when setting up rules for how the relationship should work. For example, the supplierand the customer must agree on how to deal with overstocks, ordering errors and obsolete stock. Finally, both parties must understand that this is a learning process that takes time. Equally important astime is trust. Many retailers and consumer goods firms are naturally reluctant to share information in advance,fearing that the information will somehow fall into the hands of competitors or they will lose control in someway. Industry results show, unfortunately, that many retailers have been disappointed and canceled VMI pro-grams. The blame for inadequate performance is frequently equally shared between trading partners. Trulyeffective VMI programs depend on strong partnerships with active communication, information sharing, jointproblem solving and commitments to continued development. 9 10. Conclusions: The Future of VMITrading partners who focus on changing business relationships definitely maximize their bottom lines by usingVMI.Those who have embraced VMI have seen the following benefits: Eliminated repetitive purchasing activities (85% reduction in receiving costs) Lowered cost of processing claims (95% reduction) Reduced inventory (40% to 50%) Increased inventory turns (from 3.1 to 5.5) Solidified customer-vendor relationship.Under VMI, manufacturers, retailers and distributors can focus on the same issuehow to sell more productsto the end consumer more efficiently. This changes the manufacturers focus from getting the distributor tobuy more to helping the distributor sell more.This change in relationship is surely the most exciting featureof VMI.The success of Procter and Gambles program with Wal-Mart helped make VMI a cornerstone practiceof Efficient Consumer Response (ECR), a grocery-industry initiative to remo...</p>