FEASIBILITY OF VENDOR INVENTORY MANAGEMENT (VMI) IMPLEMENTATION AMONG FIRMS WITHIN THE SAME CORPORATE GROUP

Transcription

1 FEASIBILITY OF VENDOR INVENTORY MANAGEMENT (VMI) IMPLEMENTATION AMONG FIRMS WITHIN THE SAME CORPORATE GROUP Jackson Bezerra da Silva UNINOVE, Av, Francisco Matarazzo, 612, Prédio C, 1º andar, Água Branca, São Paulo, Brasil, + 55(11) Milton Vieira Júnior UNINOVE, Av, Francisco Matarazzo, 612, Prédio C, 1º andar, Água Branca, São Paulo, Brasil, + 55(11) Rosangela Maria Vanalle UNINOVE, Av, Francisco Matarazzo, 612, Prédio C, 1º andar, Água Branca, São Paulo, Brasil, + 55(11) POMS 22nd Annual Conference Reno, Nevada U.S.A. April 29 to May 2, 2011 Abstract: An efficient integration of the supply chain has become a critical factor for companies to remain competitive. To achieve this objective, the organizations seek new technologies and business initiatives that generate lower costs, optimize the supply process and manage their inventories more automated. One of these business initiatives is the VMI (Vendor Managed Inventory), in which the supplier is responsible for keeping inventories at adequate levels of the client, generating multiple benefits for both. The aim of this paper is to verify the feasibility of implementing a VMI system among firms within the same corporate group or business unit, checking for technical advantages, economic and competitive through a case study conducted in a large multinational conglomerate companies. 1. Introduction To obtain an efficient operation of supply chain, organizations are looking to deploy new technologies that generate cost savings and increase competitiveness. To reach this efficiency, is essential that manufacturers, distributors and customers to work in a coordinated manner, in a process of mutual collaboration and thereby eliminating unnecessary costs. For example, a truck stopped in front of a discharge location, waiting the client authorization to receive goods, it generates an additional cost that is added to the product.

2 The management of supply chain includes activities such as provision of materials, production scheduling, and a physical distribution system, supported by information flows needed (KOH, SAAD, ARUNACHAL, 2006). Improvements in inventory management are an important result of investment in electronic commerce, such as an online system that carries real time information about inventory from suppliers and product availability, creating a broader and more timely, and easily the acquisition of materials (TYNDALL, 1998).In a globalized and increasingly complex scenario, with global sources of supply working with shorter delivery times and greater risk, this integration in the supply chain will require the support of information systems and technology. The growth of the Internet and technologies that enable sharing of information in real time systems such as ERP, EDI, electronic commerce and portals, can build closer relationships with customers, suppliers or service providers (SMART, 2008). Joint strategies adopted between manufacturers and customers, such as Vendor Managed Inventory (VMI), focused on efficient replenishment and the automatic generation of purchase orders, enable major improvements in the supply chain (BERTAGLIA, 2003). According Bertaglia (2003): "The Vendor Managed Inventory (VMI) is a business initiative that involves organizational processes with a objective of optimize the supply chain, in which the manufacturer is responsible for maintaining stock levels of customer or distributor. In this system the manufacturer has access to customer inventory information and the vendor is responsible for generating the purchase order, deciding which items to send, the needed quantity and the right time. The aim of this paper is to verify the feasibility of implementing a VMI system between firms within the same corporate group or business unit, checking for possible technical advantages, economic and competitive. This is a different approach on those aspects of a deployment of VMI system in a multinational conglomerate of companies that sell to each other. Even where it was searched was not identified a specific study such is now proposed. For this, it is necessary to understand all the factors essential to the implementation of this system among companies, as well as analyzing its benefits, advantages and disadvantages. 2. Methodology The methodology consisted in conducting a case study in a business conglomerate that has several segments and produces different type of materials. This group of companies sells products from companies in the same group and among different business divisions that produce different type of products and therefore has its own core business. Interviews were conducted with leaders of the purchase of each unit in order to understand their views and needs regarding the implementation of a VMI system in the scenarios analyzed. The interviews occurred in the first half of 2010, by telephone, and five people responsible for procurement of materials in the manufacturing units were interviewed.

3 Given the need to understand the procurement process adopted by the company was not drawn up a standard questionnaire, but were presented questions about the possible deployment of a VMI system, aiming to get different opinions. It was also questioned the current system of procurement, and what would be the major challenges in implementing a VMI system among companies. 3. Vendor Managed Inventory (VMI) In this theoretical review will be possible to explore and better understand the concept of Vendor Managed Inventory (VMI), which is inserted in the supply chain. The supply chain represents the group of processes required to acquire materials, add value to them according to customer specifications and offer these products, where and when customers want (BERTAGLIA, 2003). Currently, the supply chain management has proven that companies can achieve sustainable competitive advantage, competing as part of the supply chain and not as isolated entities. Therefore, companies need to focus on their core activities and seek the expertise of outside partners to manufacture and deliver products according to consumer demand. In this direction, the outsourcing of logistics functions has been a great opportunity for many businesses, which gets operational efficiency, a great flexibility, a high level of service and a better focus on core business and key benefits can be obtained (ZAMMORI; BRAGLIA; FROSOLINI, 2009). Since World War II, many researchers have considered the problems of production and inventory. The new e-manufacturing environments are concerned about the rapid response and initiatives are generally concerned with the factory-to-business (F2B) and using the processes of "lean and agile" leading engineers to pursue an optimum efficiency in supply chain (WHITE; CENSLIVE, 2006). The Vendor Managed Inventory (VMI) originated in the early 1980's with a mass of demanding distributors requiring their suppliers to assume the responsibility for inventory replenishment at retail. Currently, the concept of VMI has spread out of the retail industry (CLAASEN; WEEL; RAAIJ, 2008). In the early 1990s, awareness of economic opportunities offered in the logistics outsourcing the development of various partnership initiatives (automatic replenishment programs, ARP), which have been successfully exploited to coordinate the logistics flows to meet demand consumer as soon as possible (ZAMMORI; BRAGLIA; FROSOLINI, 2009). Contemporary organizations must choose to cooperate via combinations of supply chain that has unique strengths and resources (DORLING, SCOTT; DEAKINS, 2006). The concept of Vendor Managed Inventory (VMI) has gained prominence with the increasing collaboration and integration in the supply chain. In this collaborative practice, responsibility for inventory management of the customer is transferred from the customer to your supplier (ELVANDER; SARPOLA; MATTSSON, 2007). Interest in collaboration between supply chains participants have been growing. Consequently, the number of models has increased in different perspectives, because there are many areas available for collaboration between business partners. Collaboration models come in multiple formats, which are customized to assist the specific business relationship. There is one element in common, they are designed to improve the logistical flow of goods and supply chain performance. To achieve these

4 goals, these models focus on the flow, division and exchange of information (VIGTIL, 2007). To better understand the differences between a traditional business model and a model which uses a VMI system will follow some explanations. In the traditional model of purchasing the distributor or customer is responsible for the replenishment of inventory. The customer or distributor, to require certain material, makes a request to the manufacturer or supplier of this product. Thus, the client has effective control over their purchases of materials and will even provide the desired delivery date and order quantity. In the case of a VMI system in which inventory is managed by the supplier, the manufacturer receives the data via electronic means (Internet or EDI), which shall include the sales made by the distributor or customer as well as inventory levels by SKU (Stock keeping unit). In this case, the manufacturer or supplier becomes responsible for creating the application and maintenance of the supply of its client, and becomes responsible for generating the request (BERTAGLIA, 2003). The VMI system requires a monitoring of level customer inventory by the supplier, watching sales forecasts, conducting periodic replacements, deciding the amount of orders and shipping and handling time (DANESE, 2006). Importantly, this system does not change ownership of the stock, which still belongs to the client, unlike the concept of consignment stock. The main objective of a VMI system is to obtain a very high efficiency in the supply chain that may lead to reduced costs through (BERTAGLIA, 2003): a) Use of optimized physical space; b) Automatic resupply eliminating the occurrence of lack of materials at the plant and speeding the process of acquiring materials; c) Stock levels in the channel controlled both the supplier and the distributor. Information technology has aided the implementation of VMI systems through the creation and application development and improvement of means of communication and data transmission. Several companies have revised their supply chain in order to better meet the expectations of their customers and seeking new alternatives such as VMI (BERTAGLIA, 2003). According Borade and Bansod (2009): "In recent years, many enterprises have been obliged to share demand and inventory information with suppliers to achieve competitive advantage. The Vendor Managed Inventory (VMI) is one of these mechanisms of information sharing adopted by organizations. In VMI, the supplier or vendor has the responsibility to manage the client's stock, based on information shared among them. " Simply put, we can say that the IMV is divided into two main processes: the demand planning and replenishment, which should be investigated the capacity of the vehicles that carry goods and frequency of delivery of goods. Thus we seek to optimize the replenishment process through improved logistics flows (BERTAGLIA, 2003).

5 3.1. Benefits and problems with the VMI Is possible affirm that the benefits to the implementation of a VMI system are greater, for the whole chain, including manufacturers, suppliers, distributors and customers. Among the many benefits that have been suggested the adoption of this practice can cite: the improvement of service levels, reduced lead time delivery, increased inventory turnover, reduced stock-out and cost reduction (ELVANDER; SARPOLA; MATTSSON, 2007). VMI as an information exchange scheme implied should prevent the problem of distortion of information in the supply chain (KAUREMAA; SMAR; HOLMSTROM, 2009). Below is viewed more benefits in the supply chain due to application of VMI second Bertaglia (2003): a) Reduction of errors through the exchange and transfer of data directly, by EDI, eliminating the possibility of duplication in the procurement of materials. Consequently the speed and agility of the process will be superior to a commom process, generating a possible acquisition cost savings; b) Enhanced quality assurance in customer service, due to automated replenishment seeking to avoid delays in delivery of the product to customer; c) Loyalty and strengthening the relationship between suppliers and customers, resulting in the development of other partnerships; d) Enhanced control and stabilization of orders generated in the system, through a plan together. Even though VMI presents many benefits there are also problems that need to be thoroughly analyzed before and at the time of its implementation, we can mention: a) The electronic interface - it is very important to carry out integrated tests before starting the project to ensure that the necessary data to be transferred and the information is reliable; b) No use to demonstrate the concept only the directors or senior management of companies, but everyone involved in the process of purchasing and logistics must understand exactly how the system works; c) There shall be a contract to formalize the responsibility and direct the activities of both parties to avoid questions later; d) Both need to understand that there is an adjustment period, in which errors occur and difficulties and that some processes need to be revised or corrected (BERTAGLIA, 2003). Regarding the use of information technology tools available in the market and Bansod Borad (2009) observe: "Enterprises adopting the latest Information Technology tools to share information in real time. However, many enterprises are experiencing difficulties in adopting IT tools. Moreover, this adoption of IT tools is considered more difficult in small and medium enterprises. "

6 While many benefits of VMI have been analyzed in the literature, there are several challenges that arise in practice and that should reduce the potential profits in VMI or deal with gaps in VMI programs. Most studies are limited to identifying the factors that influence these failures. This can occur, as they only focus on the internal dynamics of VMI. However, two main factors can be extracted: a) Exchange of data uncertain because no one appropriate information technology or mutual trust in the process; b) Uncertain demand expected from the fact that suppliers are excluded from the process of demand forecasting (SARI, 2007) Implementation of a VMI system For a VMI system really works, both the supplier and the distribution channel must consider several requirements that will be demonstrated throughout this topic. One is the ability to predict consumption, which is essential for the successful implementation of the system. The first step is the provision of sales history for each item stocked by distribution channel. It is clear that such information may not reflect the reality due to non-reliability. It is therefore important that early in the project there are reliable data to avoid possible revisions in the future and that the system is designed correctly (BERTAGLIA, 2003). In the early stages, the supplier's delivery schedule needs to be approved by the client, however the goal of many programs is to eliminate VMI surveillance on specific purchase orders (DANESE, 2006). Managers in a supply chain should make a careful analysis of cost-benefit as they take their decisions on implementation and on the conditions when the performance of the members involved are poor or when the uncertainty of customer demand is high (SARI, 2007). The success of the VMI system depends completely on the cooperation between consumer and supplier. In the VMI system does not prompt the consumer purchase orders for supplier, but exchange information through a tool of Information Technology. The tools of information technology provide a broad overview of inventories (REDDY, VRATA, 2007). The available technological applications are diverse, but flexibility is an essential feature, given the need for changes in the status of an order, request or even to issue a new order at any time (BERTAGLIA, 2003). Through appropriate intervals, the application of VMI provides an estimate for replacement item. The system also needs to design the appropriate intervals between transportation. The more robust systems can also design better service levels and lower costs tied to the movement of goods. A good system should also manage multiple locations of inventory and streamline the transfer between them. Get a VMI system is not robust enough for the project to be implemented successfully. Several factors should be analyzed as: frequency of supply, inventory

7 levels, lead time for delivery, return policies, unplanned costs of transportation, and other criteria (BERTAGLIA, 2003). Several cases of successful implementation of the VMI system, can be found in the literature (REDDY, VRATA, 2007), but none proved to be similar to that proposed in this article. We can cite, for example, the case study conducted by Reddy and Vrat (2007) in a leading tire manufacturer (XYZ). The supply chain of this company is very wide. A prototype VMI model based on simulation was developed to show how VMI can improve the performance of the organization, minimizing costs associated with inventory. This article has demonstrated the benefits and capabilities of the VMI model using simulation through a case study. Another exploratory multiple case study conducted by Kauremaa, Smara, Holmstrom and sought to answer two questions: What kinds of benefits are realized by a VMI system (operational efficiency reported, strategies, sales) and what benefits are divided among the participants in the process (suppliers and customers) (KAUREMAA; SMAR; HOLMSTROM, 2009). 4. Case Study After being held to a theoretical review, which was possible to identify and understand the concept of VMI, its main benefits and advantages, and implications in its implementation, will now be made to analyze the case study conducted. The aim of this paper is to evaluate the feasibility of implementing a VMI system among companies in the same group and same division of a business, checking for technical advantages, economic and competitive. The analyzed company is a multinational conglomerate company that has several segments and produces various types of materials. This group of companies sells products between the companies of a same group and between different business divisions that produce different and have their own core business. This conglomerate is divided by business divisions that have different business segments and produce different type of materials. Within each of these business divisions, there are companies and plants located in various states. This structure is shown in Figure 1. It was identified that companies sell from different business divisions large volumes of goods. It also found that companies in the same business division, or the same business group, also traded and transferred between them large volumes of goods. From this identification arose the idea of examining the feasibility of implementing a VMI system between firms within the same group, verifying the likely positive and negative impacts this process. Two scenarios are analyzed in this article: a) Implementation of a VMI system between companies in different business divisions and working with different clients in the ERP (Enterprise Resource Planning) used; b) Implementation of a VMI system between companies in the same division or business group and working with a same client on the ERP system used.

8 The following case study was divided into two parts, two different scenarios are analyzed as described above. First, we describe the scenarios and then it will be analyzed. Figure 1 - Structure of business divisions and associated companies 4.1. Description of Scenario 1: feasibility of implementing a VMI system between companies from different business divisions In the first scenario is analyzed the feasibility of implementing a VMI system between companies that belong to different business divisions, and therefore has different segments. These companies work with the same type of ERP system, called SAP. In the beginning of the new millennium, the largest software company, whose success was based on its ERP product, is the German SAP. Although founded over 28 years, its recent success was almost entirely caused by the fact that all companies are willing to invest large sums of money in order to plan their resources in an integrated manner (SLACK ET AL., 2008A). This system, widely known and used in companies, although very thorough and comprehensive, has many problems regarding its use in the procurement process. However, each company has a different client, which means that both ERP and have no communication or data exchange, and also the information or database is not the same. The client is a unit within an SAP system, which is self-contained in terms of legal, organizational and data, with separate master record and an individual set of tables. The client represents the highest rank within the SAP system. Specifications or data entered into the database of the client applies to all companies and all other organizational units. From a business standpoint, the client is a corporate group (KA SOLUTION, 2010). For better understanding, Figure 2 illustrates what this means differences in clients within an ERP system.

9 Figure 2 - Differentiation of ERP systems for different divisions 4.2. Description of Scenario 2: feasibility of a VMI system between companies in the same business division In the second scenario analyzed, there were two companies of the same corporate group or business division and trading among themselves. In this case both have the same core-business owners, but generate different products. It is also necessary to point out that both companies are working with the same client within the ERP system, so the ERP system is the same and it is possible communication or electronic transmission of data via ERP between the companies. Figure 3 illustrates the operation of the ERP between these companies and reinforces understanding Scenario analysis 1: feasibility of implementing a VMI system between companies from different business divisions The first stage of analysis was to identify a product that is sold in large volume between two companies belonging to different business divisions. One product was identified with high potential for sales between firms. This product is used in the production process of one of these companies and thus is essential for the proper functioning of the same and bought in batches with high amounts.

10 Figure 3 - Operation of ERP among companies in the same business division or business group The second step was to initiate informal interviews with the acting in this process of buying and selling, to understand their vision, their needs, and their opinion regarding the possibility of implementing a VMI system among business partners. It identified the main responsible for the acquisition of materials, which were defined: buyers, sellers and responsible for warehouse and inventory of materials. The idea of developing a system that VMI would create a communication between two ERP systems, and automation of the replenishment process was well regarded by the beginning of the purchasing company. However, the purchasing company had some problems and disagreements in the generation of a new system, the need for loyalty to another company with a different business division. What happens is that despite the volume of sales is high, the prices of the partner company of the same group are higher than other suppliers on the market due to its brand is a traditional brand. Therefore, the purchasing company makes a contribution in which portions of this product is purchased from smaller vendors until achieve determined quantity by creating a certain amount of rotation scheme provider.

11 Therefore, one can say that despite the initial interest shown by the purchasing company, the possibility of implementing a VMI system presented in this particular case is not feasible mainly due to the need for loyalty to a single business partner. Were also held informal talks with the seller company. The representatives consulted in this company, also did not welcome the idea of implementing a VMI system in this particular case, given the need for a high investment in a new application of Information Technology and loyalty with a single business partner. Moreover, it would be too complex to deploy a system to meet companies that already have a good organization and logistics flow in their businesses, the current system already meets the needs and the possible benefits outweigh the problems do not hit and damage which could be generated this implementation Analysis of Scenario 2: implantation of a VMI system between companies in the same business division or business group In this case study was also held informal interviews with the purchasing companies that will call the company 1,2,3,4 and 5 and we will call the seller company in June. To identify a product applicable to an implementation of VMI was extremely easy because the company manufactures a six essential raw material for the manufacturing process of products manufactured in business 1,2,3,4 and 5. Actually the company manufactures and sells only six companies belonging to the same corporate group or business unit, or in relation to this specific raw material, we can say that this group of companies is self sufficient. This is because this raw material is a product of high technology and development and not in the interest of the company to share that technology with the market and consequently to the competition by selling the product for these competitors and subsequent analysis of benchmarking for them. In this particular case, since the company already produces only 6 to meet the demand of enterprises in the same business division, the advantages and benefits of implementing a VMI system to restrict the possibility of viewing each other stocks, passing the responsibility to automatic replenishment 6 for the company, thus reducing the cost of purchasing companies 1,2,3,4 and 5. Thus, firms 1,2,3,4 and 5 would reduce their cost of acquisition of this raw material particular, in various ways, such as: agility in the purchasing process, reducing logistics costs, reducing the need for handworkforce in the purchasing companies, among other benefits, thus bringing greater profitability to the business overall. In conversations that were held with representatives of the company in June, they discovered an important point and generated a new vision about this possibility. It was detected that the current ERP system itself already allows you to see the amount of raw material in inventory between the different companies. This removes the advantage of implementing a VMI system, which in this case would be too costly and unnecessary since the ERP system itself may already have this application, however, was not being used this feature so far. Therefore, this second scenario the feasibility of implementing a VMI system among companies in the same group was eliminated to realize that the current ERP system could already meet all the needs if properly used its features. A VMI system would be costly for the few advantages that would be realized by the business group.

12 5. Conclusion This paper presents an approach pioneer in examining the feasibility of implementing a VMI system between companies in a group controller. Work identified earlier cases dealing with groups of enterprises belonging to different controllers. Even if the partner companies belonging to the same group controller, it is noted that issues such as price and delivery time are also factors that influence the development of trade relations, creating an obstacle to the fidelity required for the implementation of a VMI system. Despite the expected results were negative in the two scenarios presented in this article, we can not conclude that this implementation is not beneficial in other business groups that sell to each other. The idea of implementing a VMI system between firms within the same corporate group, and therefore are already partners in business and have the same goal seems to be quite attractive and would need to be tested in other settings. Thus, one could get a real analysis on the positive or negative aspects of this implementation of a broader. References BERTAGLIA, P.R. Logística e gerenciamento da cadeia de abastecimento. São Paulo: Saraiva, BORADE, A.; SATISH, B. Vendor managed forecasting: A case study of small enterprise. Journal of Industrial Engineering and Management, v2n.1, p , CLAASSEN, M.J.T.; WEELE, A.J.V.; RAAIJ, E.M.V. Performance outcomes and success factors of vendor managed inventory. Supply Chain Management: An International Journal, 13/6, p , DANESE, P. The extended VMI for coordinating the whole supply network. Journal of Manufacturing Technology Management, v17n.7, p , DORLING, K.; SCOTT, J.; DEAKINS, E. Determinants of successful vendor managed inventory relationships in oligopoly. International Journal of Physical Distribution & Logistics Management, v36n.3, p , ELVANDER, M.S.; SARPOLA, S.; MATTSSON, S. Framework for characterizing the design of VMI systems. International Journal of Physical Distribution & Logistics Management, v37n.10, p , KAUREMAA, J.; SMAROS, J.; HOLMSTROM, J. Patterns of vendor managed inventory: finding from a multiple-case study. International Journal of Operations & Production Management, v29n.11, p , KA SOLUTION. Formação de Consultores SAP MM: Administração de Materiais: Parte 1 - Apresentação. São Paulo: Ka Solution, KOH, S.C.L.; SAAD, S.; ARUNACHALAM, S. Competing in the 21 st century supply chain management and enterprise resource planning integration. International Journal of Physical Distribution & Logistics Management, v36, n.6, p , SARI, K. Exploring the benefits of vendor managed inventory. International Journal of Physical Distribution & Logistics Management, v37n.7, p , SLACK, N. et al. Administração da Produção. São Paulo: Ed. Atlas, 2008a. TYNDALL, G. et al. Ten stategies to enhance supplier management. National Productivity Review, VIGTIL, A. Information exchange in vendor managed inventory. International Journal of Physical Distribution & Logistics Management, v37n.1, p , 2007.

13 ZAMMORI, F.; BRAGLIA, M.; FROSOLINI, M. A standard agreement for vendor managed inventory. Strategic Outsourcing: An International Journal, v2n.2, p , SMART, A. E-business and supply chain integration. Journal of Enterprise Information Management, v21, n.3, p , SIDNEY, A. S.; CENSLIVE, M. Observations on modeling strategies for vendor-managed inventory. Journal of Manufacturing Technology Management, v17n.4, p , REDDY, M; VRAT, P. Vendor managed inventory model: a case study. Journal of Advances in Management Research, v4n.1, p.83-88, 2007.