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In 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 howIntentia's 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.

Figure 1. ECR focus areas

Efficient Consumer Response (ECR), Quick Response (QR),Vendor Managed Inventory (VMI) and other sim-ilar efforts have had a great impact on today's 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.

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A 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 customer's 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 shelves–often more than 25,000 in one store–have 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 vendor's 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, consignmentstock may not be shown as an asset in the consignee's books.

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In the example that follows, it is assumed that the vendor (supplier) manages the inventory level and avail-ability at the distributor's (customer's) warehouse, based on forecasted demand and current stock level infor-mation sent from the distributor.

From the supplier's perspective, a VMI model generally entails:1. Receiving stock levels from a customer 2. 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.

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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 newtechnologies, such as eXtensible Markup Language (XML), have recently surfaced.

Many people are concerned that the benefits of electronic commerce standards such as EDI will beswept away by the excitement of the Internet. However, we believe that it is not realistic that EDI will bereplaced 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 toenable 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 stockbalances 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 atthe customer site, payment is made with an electronic funds transfer from the customer's bank. Anothercommon scenario is that the customer receives an invoice only after sending a sales report EDI message tothe manufacturer.

In the CRP-VMI process, these EDI messages can usually be seen:· Inventory report· Sales forecast· Order response· Dispatch advice· Sales report· Invoice.

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In 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 customer's warehouse is speci-fied as a warehouse in Movex.The current balance in the customer's 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.

Figure 2.The Movex VMI flow

In 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 manufacturer's warehouse and the distributor's 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).

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A 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 VMI's many benefits are listed below.

Supplier benefits:

· Visibility to the customer's 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: www.VendorManagedInventory.com)

Long-term benefits include more efficient promotion handling, improved product introductions, more effi-cient product distribution and an eventual increase in sales.

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VMI–called Very Mixed Impact by some–has 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. It's 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.

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Trading 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 issue–how to sell more productsto the end consumer more efficiently.This changes the manufacturer's 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 Gamble's program with Wal-Mart helped make VMI a cornerstone practiceof Efficient Consumer Response (ECR), a grocery-industry initiative to remove excess inventory from thepipeline and synchronize consumer demand with production.And for many of the companies that have triedit,VMI has produced remarkable results. Sales, service and profitability are all improved by turning the tableson the traditional trading relationship.

However, critics of initiatives like VMI claim that the farther you move up the supply chain, the less visi-bility you have. Ironically, VMI was created as a means of providing increased supply chain visibility. Industryexperts believe that VMI works best when a manufacturer restocks a product that does not have much vari-ation and is not subject to seasonal fluctuations in demand.

VMI is not a new concept. In fact, the basic concept of automated inventory replenishment by suppliershas been around in the retail world for more than 30 years. However, as with other trends,VMI will likely beredefined or replaced. We can see that similar trends such as Supplier Managed Inventory (SMI) or JointManaged Inventory (JMI) are merely different ways of looking at the same thing.

Today, focus is shifting beyond VMI toward programs like Collaborative Planning, Forecasting andReplenishment (CPFR). With CPFR, a retailer sends data to a manufacturer over the Internet, and the man-ufacturer then uses the data to generate a replenishment forecast that will be shared with the retailer beforeit is executed. Unlike VMI, the manufacturer and retailer jointly decide on replenishment actions in the CPFRscheme that was designed by both parties.

Whatever the buzzword or latest trend, the business goals are clear :

· Cut costs

· Reduce inventory along the supply chain

· Avoid stockouts and thereby ensure consumer loyalty.

So, can VMI really help? We believe that the answer is simple. Implemented and interpreted incorrectly,VMIcan result in a very mixed impact. But managed properly,VMI can clearly help companies improve their rela-tions with each other and can definitely be a vital part of a collaborative approach to doing business.

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The contents of this document may be amended without prior notice and do not form any binding undertaking.The document may containtechnical inaccuracies or printer's errors. It is also possible that the material contains information on products that are not available in all coun-tries.The copying of this document in any form or any way, electronically or mechanically, including photocopying, for any purpose is prohibit-ed by law except where expressly permitted by Intentia International AB. Movex® is a registered trademark or a trademark for which regis-tration has been applied belonging to Intentia International AB.All other product names are trademarks of their respective owners.

© Copyright Intentia International AB 2001.

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Intentia is one of the world’s leading suppliers of e-collaboration solutions. Our vision is to become the lead-ing global e-collaboration solutions vendor by supplying our customers with tomorrow’s solutions today.Intentia offers a one-stop shop for all e-collaboration needs within numerous industry segments.We devel-op, implement and maintain our own e-collaboration solutions to produce the highest possible level of cus-tomer satisfaction. Intentia has more than 3,200 employees and serves over 3,400 customers in the manu-facturing, maintenance and distribution industries via a global network spanning some 40 countries.

Visit Intentia’s Web site at www.intentia.com

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