RETAILER SUPPLIER PARTNERSHIPSSUPPLY CHAIN MANAGEMENT AND LOGISTICS

CONTENTS

Introduction 3

Types of Strategic Alliances 4

Retailer-Supplier Partnerships(RSP) 5

Types of RSP 5

VMI 5

Advantages 7

Challenges 8

Indian Examples: Maruti and Shopper’s Stop 11

Characteristics of Retailer-Supplier Partnership 13

Requirements for Retailer-Supplier Partnership 14

Inventory ownership in Retail-Supplier Partnerships 15

Issues in Retailer-Supplier Partnerships Implementation 15

Steps in Retailer-Supplier Partnerships Implementation 16

Advantages of Retailer-Supplier Partnerships 17

Disadvantages of Retailer-Supplier Partnerships 17

Bibliography 18

2

Introduction

Supply chain management (SCM) is the process of planning, implementing, and controlling the

operations of the supply chain with the purpose to satisfy customer requirements as efficiently as

possible. Supply chain management spans all movement and storage of raw materials, work-in-

process inventory, and finished goods from point-of-origin to point-of-consumption. The term

supply chain management was coined by consultant Keith Oliver, of strategy consulting firm

Booz Allen Hamilton in 1982.

Supply Chain Management encompasses the planning and management of all activities involved

in sourcing, procurement, conversion, and logistics management activities. Importantly, it also

includes coordination and collaboration with channel partners, which can be suppliers,

intermediaries, third-party service providers, and customers. In essence, Supply Chain

Management integrates supply and demand management within and across companies.

Key players in SCM are:

There are a number of strategic alliances amongst the above mentioned players. A Strategic

Alliance is a formal relationship formed between two or more parties to pursue a set of agreed

upon goals or to meet a critical business need while remaining independent organizations.

Partners may provide the strategic alliance with resources such as products, distribution

channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or

intellectual property. The alliance is cooperation or collaboration which aims for a synergy

where each partner hopes that the benefits from the alliance will be greater than those from

individual efforts. The alliance often involves technology transfer (access to knowledge and

expertise), economic specialization, shared expenses and shared risk

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Benefits of Strategic Alliances

Strategic alliances often bring partners the following benefits:

Access to their partner's distribution channels and international market presence

Access to their partner's products, technology, and intellectual property

Access to partner's capital

New markets for their products and services or new products for their customers

Increased brand awareness through partner's channels

Reduced product development time and faster-to-market products

Reduced R&D costs and risks

Rapidly achieve scale, critical mass and momentum (Economies of Scale - bigger is

better)

Establish technological standards for the industry and early products that meet the

standards

By-product utilization

Management skills

Types of Strategic Alliances

Third Party Logistic: 3PL is the use of an outside company to perform all or part of the

firm’s material management and product distribution functions.

Retailer-Supplier Partnerships: It’s the formation of strategic alliances between the

retailers and their suppliers.

Distributor Integration: This appreciates the value of the distributors and their

relationship with the end users and provides them with the necessary support to be

successful.

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Retailer-Supplier Partnership

It’s the formation of strategic alliances between the retailers and their suppliers.

Types of Retailer-Supplier Partnerships

Quick Response Strategy: Here suppliers receive Point of Sale (POS) date from the

retailers and use this information to synchronize their production and inventory activities

with actual sales at the retailer. In the strategy the retailer still prepares individual orders,

but the POS data are used by the supplier to improve forecasting and scheduling and to

reduce local time. This system could be preferred when the retailer-supplier relationship

is new, and trust between the two parties has not been fully developed yet. In this

strategy, the retailer has complete control on its inventory, but helps suppliers improve

operations by providing POS data. Additionally, this type of partnership could be

preferred if financial and personnel resources to develop a more integrated relationship

are not available.

Continuous Replenishment Strategy: This is also called rapid replenishment. Here the

vendors receive POS data and use these data to prepare shipments at previous agreed-

upon intervals to maintain specific levels of inventory. In an advanced form of

continuous replenishment, suppliers may gradually decrease inventory levels at the retail

store or distribution center as long as the service levels are met. Thus, in a structured way

inventory levels are continuously improved. Also the inventory levels need not be simple

levels, but could be based on sophisticated models that change the appropriate level based

on seasonal demand, promotions, and changing customer demand. This type of

partnership is a system between quick response and VMI, because suppliers and buyers

together agree on target inventory and service levels. It involves less risk for retailers

than VMI, and typically leads to a more stable and long-term relationship between

suppliers and retailers than quick response does.

Vendor-Managed Inventory (VMI) System: This is also called vendor-managed

replenishment (VMR) system. Here the supplier decides on the appropriate inventory

levels of each of the products and the appropriate inventory policies to maintain these

levels. In the initial stages vendor suggestions must be approved by the retailer but

eventually the goal of many VMI programs is to eliminate retailer oversight on specific

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orders. This type of relationship is being used in Wal-Mart and P&G, whose partnership

began in 1985. It has dramatically improved P&G’s on time deliveries to Wal-Mart while

increasing inventory turns. This system is more integrated than the previous two systems,

and requires a high level of trust between the supplier and the buyer. If implemented

properly, VMI can lead to more overall system savings than the other two types of

partnerships. However, VMI requires more commitment, and initially, significant

investment in information infrastructure, time and personnel.

Benefits of VMI Process

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The VMI process brings benefits for both retailers and suppliers. Some of those benefits are

listed below.

Retailer Benefits

Reduced inventory: This is the most obvious benefit of VMI. Using the VMI process,

the supplier is able to control the lead-time component of order point better than a

customer with thousands of suppliers they have to deal with. Additionally, the supplier

takes on a greater responsibility to have the product available when needed, thereby

lowering the need for safety stock. Also, the supplier reviews the information on a more

frequent basis, lowering the safety stock component. These factors contribute to

significantly lower inventories.

Reduced stock-outs: The supplier keeps track of inventory movement and takes over

responsibility of product availability resulting in a reduction of stock outs, there-by

increasing end-customer satisfaction.

Reduced forecasting and purchasing activities: As the supplier does the forecasting

and creating orders based on the demand information sent by the retailer, the retailer can

reduce the costs on forecasting and purchasing activities.

Increase in sales: Due to less stock out situations, customers will find the right product at

right time. Customers will come to the store again and again, there-by reflecting an

increase in sales.

Supplier Benefits

Improved visibility results in better forecasting: Without the VMI process, suppliers

do not exactly know how their customers are going to place orders. To satisfy the

demand, suppliers usually have to maintain large amounts of safety stocks. With the VMI

process, the retailer sends the POS data directly to the vendor, which improves the

visibility and results in better forecasting.

Reduces PO errors and potential returns: As the supplier forecasts and creates the

orders, mistakes, which could otherwise lead to a return, will come down.

Improvement in SLA: Vendor can see the potential need for the item before it is

actually ordered and right product is supplied to retailer at right time improving service

level agreements between retailer and supplier.

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Encourages supply chain cooperation: Partnerships and collaborations are formed that

smooth the supply chain pipeline.

Challenges and Limitations of VMI

The VMI approach has its own set of challenges and limitations:

Some companies continue to manufacture to stock without leveraging customer specific

data effectively for production planning

In order to provide priority service to VMI partners, some vendors reserve inventory

resulting in shortages to other customers

Insufficient level of system integration results in incomplete visibility

High expectations from retailers

Resistance from sales forces due to concerns of losing control, effecting sales based

incentive programs

Lack of trust and skepticism from employees

Overcoming the Limitations

Effective implementation of VMI depends on smoothly overcoming the limitations and

addressing the concerns of various stake holders. Some of the concerns can be addressed as

explained below:

Redefine incentive programs based on partnership building instead of sales volume

Build strong partnerships with management commitment to effective communication,

active sharing of information, commitments to problem solving and continued support

Conduct simulations and pilots before actual implementation

Organize training sessions before launching VMI program

Set reasonable targets for benefits of VMI

Establish agreements on service levels and process to handle exceptions

VMI in Retail Supply Chain

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Success in supply chain management usually derives from understanding and managing the

relationship between inventory cost and the customer service level. The most attractive projects

yield improvements along both dimensions, and this is certainly the case with VMI.

Reduced Cost

Demand volatility is the key problem facing most supply chains, eroding both customer service

and product revenues. In traditional retail situations, sales fluctuations are made worse by

management policies. Ordering patterns may be aggravated by demand uncertainties in general,

conflicting performance measures, planning calendars used by buyers, buyers acting in isolation,

and product shortages that cause order fluctuation.

Many suppliers are attracted to VMI because it mitigates uncertainty of demand. Infrequent large

orders from consuming organizations force manufactures to maintain surplus capacity or excess

finished goods inventory, which are very expensive solutions, to ensure responsive customer

service. VMI helps dampen the peaks and valleys of production, allowing smaller buffers of

capacity and inventory.

Buyers are attracted because VMI resolves the dilemma of conflicting performance measures.

End-of-month inventory level for example, is a key performance measure for retail buyers, but

customer service level (tracked by some sort of out-of -stock measure) is also applied. These

measures are contradictory. Buyers stock up at the beginning of the month to ensure high levels

of customer service, then let inventory drop at the end of the month to “meet” their inventory

goals (disregarding the effect on service level measures) The adverse effect is even more

pronounced when end-of -quarter incentives are tied to financial reporting. The combined result

of this behavior is a monthly order spike to the supplier.

With VMI, the frequency of replenishment is usually increased from monthly to weekly (or even

daily), which benefits both sides. The supplier sees a much smoother demand signal at the

factory. This reduces costs by permitting better resource utilization for production and

transportation; it also reduces the need for large buffer stocks. The vendor can make

replenishment decisions according to operating needs, and also has heightened awareness of

trends in demand. The consuming organization benefits from legitimately lower cycle stocks, not

just low end-of-month inventories intended to make performance lead the reward system. Even if

the buyer has surrendered ownership to the supplier, many benefits arise from improved

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transportation and warehouse efficiencies. Moreover, service levels will go up at the end of the

month or quarter.

Finally, transportation costs are reduced with VMI. Managed properly, the approach helps

increase the percentage of low-cost full truckload shipments and eliminates the higher-cost less

than truckload (LTL) shipments. This is achieved by allowing the supplier to coordinate the re-

supply process instead of responding automatically to orders as they are received. Another

attractive option is more efficient route planning; for example, one dedicated truck can make

multiple stops to replenish inventories for several near by customers.

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Maruti Udyog Ltd.

In 2003, Maruti produced 359,960 vehicles, operating at a capacity utilization of 103%, against

the industry average of 57.8%.Vendor management became an important area as Maruti

attempted to improve operational efficiency. Maruti procured components worth about Rs.5,000

crores every year. The company's top 10 vendors accounted for about 34 % of its aggregate

purchases of components from vendors in India.

Maruti was working on a 3.5% per annum

reduction in vendor prices by 2004-2005.

Maruti streamlined the sourcing and stocking of

materials and components through its Delivery

Instruction system, one of Suzuki's best

practices. This system provided details of

Maruti's component requirements for every 15

days, across the different variants of the various models, to its vendors. Web initiatives helped

Maruti to bring down procurement time and costs.

Shopper’s Stop

Their Supply Chain Objectives are:

Customer Objectives

Partner Objectives

Organization Objectives

The Customer Objectives

Customer always gets the merchandise of his / her size

and choice

Merchandise is always presentable and ready befor customer entry

Customer easily locates price tags and product information

Price on the price tag and Point of Sale System always match

Timely replenishment of fast moving merchandise

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The Partner Objectives

Partners always deliver the right quantities as per schedule

Partners are always paid as per credit terms

Sharing of information with partners related to sales stocks and purchase orders

Organization Objectives

Customer Response Time

Merchandise Availability

Distribution Cost

Shrinkage

Efficiency of executive time

Collaboration with Partners

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The above strategy followed helps Shopper’s Stop to reduce lead time and in achieving following:

Characteristics of Retailer-Supplier Partnership

Criteria

Type

Decision Maker Inventory

Ownership

New Skills employed

by Vendors

Quick Response Retailer Retailer Forecasting skills

Continuous

replenishment

Contractually agreed

to levels

Either party Forecasting and

inventory control

Advanced

continuous

replenishment

Contractually agreed

to and continuous

improved levels

Either party Forecasting and

inventory control

VMI Vendor Either party Retail management

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Requirements for Retailer-Supplier Partnership

Advanced Information Systems: This is needed on both the supplier and retailer sides

of the supply chain. Electronic data interchange, EDI or internet based private exchanges-

to relay POS information to the supplier and delivery to the retailer- are essential to cut

down on data transfer time and entry mistakes. Bar coding and scanning are essential to

maintain data accuracy. Inventory, production control, and planning systems must be on

line, accurate and integrated to take advantage of the additional information available.

Top management commitment: This is important as information that is kept

confidential up to this point will now has to be shared with suppliers and customers, and

cost allocation issues will have to be considered at a very high level. It is also true as such

a partnership may shift power within the organization from one group to another. For

example, when implementing a VMI partnership the day to day contacts with retailers

shift from sales and marketing personnel to logistic personnel. This implies that

incentives for and compensation of the sales force have to be modified since retailer’s

inventory levels are driven by supply chain needs not by pricing and discount strategies.

This change in power may require involvement of top management.

Partners to develop trust amongst them: Without this the alliance will fail. In VMI for

example, suppliers need to demonstrate that thy can manage the entire supply chain i.e.

they can manage not only their own inventory but also that of the retailer. Similarly in

quick response confidential information is provided to the supplier, which typically

serves many competing retailers. In addition, strategic partnering in many cases results in

significant reduction in inventory at the retailer outlet. The supplier needs to make sure

that the additional available space is not used to benefit the supplier’s competitor.

Furthermore, the top management at the supplier must understand that the immediate

effect of decreased inventory at the retailer will be a one-time loss in sales revenue.

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Inventory ownership in Retail-Supplier Partnerships

Inventory ownership issues are critical to the success of this kind of strategic alliance effort

especially one involving VMI. Originally ownership of goods transferred to the retailer when the

goods were received. Now, some VMI partnerships are moving to a consignment relationship in

which the supplier owns the goods until they are sold. The benefit of this kind of relationship to

the retailer is obvious: lower inventory costs. Furthermore since the supplier owns the inventory,

it will be more concerned of managing it as effectively as possible. One possible criticism of the

original VMI scheme is that the vendor has an incentive to move to the retailer as much

inventory as the contract allows. If this is fast moving item and the partners had agreed upon two

weeks of inventory, this may be exactly what the retailer wants to see in stock. If however, this is

a more complex problem of inventory management, the vendor needs to have an incentive to

keep inventories as low as possible, subject to some agreed-upon service levels. For example,

Wal-Mart no longer owns the stock for many of the items it carries, including most of its grocery

purchases. It only owns then briefly as they are being passed through the checkout scanner.

Issues in Retailer-Supplier Partnerships Implementation

For an agreement to be successful, performance measurement criteria must also be agreed to.

These criteria should include non financial measures as well as the traditional financial measures.

For example, non financial measures could include POS accuracy, inventory accuracy, shipment

and delivery accuracy, lead times and customer fill rates.

When information is being shared between suppliers and retailers, confidentiality becomes an

issue. Specifically a retailer who deals with several suppliers within the same product category

may find that the category information is important to the supplier in making accurate forecasts

and stocking decisions. Similarly, there may be a relationship between stocking decisions made

by several suppliers.

When entering into any kind of strategic alliance it is important for both the parties to realize that

there will be problems that can only be worked out through communication and cooperation. In

many cases, the supplier in the partnership commits to fast response to emergencies and

situational changes at the retailer. If the manufacturing technology or capacity does not currently

exist at the supplier, they may need to be added.

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Steps in Retailer-Supplier Partnerships Implementation

Following steps are to be followed in VMI implementation

1. Initially the contractual terms of the agreement must be negotiated. These include

decisions concerning ownership and when it is to be transferred, credit terms,

ordering responsibilities, and performance measures such as service or inventory

levels, when appropriate

2. Following three tasks must be executed:

If they do not exist, integrated information systems must be developed for

both supplier and retailer. These information systems must provide easy

access to both parties.

Effective forecasting techniques to be used by the vendor and the retailer must

be developed

A tactical decision support tool to assist in coordinating inventory

management and transportation policies must be developed. The systems

developed will depend on the particular nature of the partnership

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Advantages of Retailer-Supplier Partnerships

The knowledge the supplier has about order quantities, implying an ability to control the

bullwhip effect. This though varies from one partnership to other. In quick response for

example, this knowledge is achieved through transfer of customer demand information

that allows the supplier to reduce lead time, while in VMI the retailer provides demand

information and the supplier makes ordering decisions, thus completely controlling the

variability in order quantities. This knowledge can be leveraged to reduce overall system

costs and improve overall system service levels.

Better service levels, decreased managerial expenses, and decreased inventory costs for

the supplier.

Vendor is able to reduce forecast uncertainties and thus better coordinate production and

distribution in terms of reduced safety stocks, reduced storage, delivery costs and

increased service levels

Good opportunity for the reengineering of the retailer-supplier partnership. For example,

redundant order entries can be eliminated, manual tasks can be automated and

unnecessary control steps can be eliminated from the process

Disadvantages of Retailer-Supplier Partnerships

It is necessary to employ advanced technology, which is often expensive

It is essential to develop trust in what once may have been an adversarial supplier-

retailer relationship

The supplier often has much more responsibility than retailer. This may force the

supplier to add personnel to meet this responsibility

Expenses at the supplier often increase as managerial responsibilities increase.

Inventory cost may also increase for the supplier

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Bibliography

www.thehindubusinessline.com/praxis/pr0303/03030560.pdf

http://www.tezu.ernet.in/dba/Faculty/mrinmoy/retail.pdf

http://www.tcs.com/NAndI/default1.aspx?Cat_Id=219&DocType=324&docid=430

en.wikipedia.org/wiki/Supply_chain_management

blonnet.com/praxis/pr0303/03030500.pdf

www.i2.com/assets/pdf/PDS_shelf_level_evmi_v61_pds7274_0105.pdf

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