Benefits and example of using VMI technology - Supply Chain Management

Benefits and example of using VMI technology

The implementation of the VMI program, depending on the conditions and agreed arrangements, can be both beneficial for both parties and unprofitable for one of the contractors of the supply chain.

The benefits for the customer are as follows.

1. Reduction of stocks. This is the most obvious benefit of using VMI. The insurance stock is replaced by information on demand and therefore is reduced. Now the client has what is needed in the stock, as the supplier tracks the demand when the client needs due to better planning.

2. Reduced deficit ( stock-outs ). The supplier tracks stock movements and is responsible for the availability of products from the customer. Since the information on demand is now available to the supplier, it is easier for him to ensure the availability of exactly the goods required, which leads to increased customer satisfaction.

3. The labor costs for forecasting and purchasing activities are reduced. The client in the VMI situation does not bear the cost of placing orders and forecasting if the provider has assumed this obligation.

4. Increase in sales. If the customer always has the right product at the right time, then the level of customer satisfaction grows and sales increase.

The benefits for the vendor are as follows.

1. Increasing the availability of information about demand leads to better forecasting and planning of supplies (production). When working without VMI, the vendor often does not know exactly when and to what extent their customer will place an order for replenishment. To satisfy customer demand, the supplier needs to keep excess insurance stocks. With transparent demand, the supplier can not do this.

2. Reduction of errors in orders. Since the vendor determines what and when to deliver, the number of errors in orders and returns is reduced.

3. Improving the level of service.

4. Establishing a partnership with the customer in the supply chain.

Below is a practical situation of using VMI technology on the example of Whitbread beer company (WBC).

Example of using VMI technology

WBC is the brewing division of the Whitbread company, which is engaged in brewing and retailing of alcoholic beverages. The company is one of the leading brewing companies in the UK, with an extensive portfolio of pub bookings, a chain of restaurants and hotels. Also, the company is the largest owner of a patent (license) for the right to distribute its products through outlets located on the main streets of major cities in the UK. In connection with the decision of the Commission for the Education of Monopolies in 1992, investments in the brewing business were formally separated from profits from retail trade. Nevertheless, this brewing company continues to regulate the supply and monitor the third-party production of alcoholic beverages intended for wholesale and retail sales carried out by the company. Under its control, there is also retail sales of products through stores with a network of branches and groceries. The constantly changing demand on the market said that WBC, along with most of its competitors, diversified the order book of products, but the spread of new brands created difficulties in the production sphere of the brewing business, which is associated with an increase in production lots. Pressure to optimize production could lead to an increase in stocks of finished products, which will become difficult to track in an extensive sales system. This, in turn, could reduce the quality of the goods (especially those that are in small quantities but at the same time in high demand brands), which is related to storage conditions.

In order to develop a more efficient and dynamic system of relations with suppliers, WBC has been developing since the 1990s. engaged in a gradual reorganization and rationalization of the structure of the supply of alcoholic beverages. Wherever possible, the end-of-sales stocks were combined and sent back to the distribution network. Meanwhile, the delivery of goods from the company's warehouse premises to 3,850 pubs and hotels, as well as to outlets located on 1,524 main streets, was implemented in a timely manner. In 1995, a decline in the price of beer in the marketplace forced the WBC to explore the possibility of further reducing inventories within its own distribution network by soliciting major liquor suppliers to resell shares in exchange for an agreement on joint inventory management.

According to the experimental program, the Whitbread company provided the American company "Anheuser" A 13-week forecast with daily information about the stock of products "Anheuser" in each of the Whitbred distribution centers. This information informed the company "Anheuser" that the Whitbread company planned to sell and what had already been sold. Companies Anheuser it was allowed to decide which goods to ship and in what quantity. This ensured the norms of reserves on the territory of storage facilities (about 2-4 days) and, accordingly, the range of products was completely stipulated. Such dynamism enabled the supplier to manage its products and most effectively plan its transportation. As a guarantee of delivery from the Whitbread company, it was required to warn the customer about the receipt of the goods 24 hours before the receipt of the goods. It can be noted that during the year of VMI technology trading, there was not a single case that led to a change in the vendor order.

The use of VMI technology has shortened the shelf life of the company's Whitbread products "Anheuser" from 8 to 4 days, while the level of service has increased from 98.6 to 99.3%. The fact that the Whitbread company is producing substitute products gave the company Anheuser stimulus to prevent cases of deficiency. Some stocks were moved to the supplier, but overall the level of inventory in the system was reduced. The company Anheuser benefited from access to better forecasts and information about sales, as well as better use of assets. As the VMI provider of Anheuser preference was given in the distribution of priority deliveries and it was allowed to fully load trucks with a diverse range of products. The regularity and volume of consignments (shipments) - three per day to each of the five Whitbred distribution centers - were achieved due to the fact that further transportation was carried out by means of a reverse loading of cars.

In July 1996, the Whitbred company held a conference with seven major suppliers, whose goal was to share the experience gained during the existence of the pilot program "VMI - Anheuser", and it was also planned to discuss the issue of its extension. Major suppliers (accounting for 10% of all suppliers) provided approximately 50% of the cost of all Whitbred stocks, 60% of sales, 55% of invoices and 80% of the value of marketable products. The Whitbread company estimated that the deployment of the VMI program, including the remaining 6 suppliers, will lead to an increase in sales of $ 1.4 million. In addition, smaller stock levels mean fewer warehouses and fewer distribution centers, which will result in additional savings for the company's assets.

By the end of 1996, the two leading Whitbread suppliers - the manufacturer of light (non-alcoholic) drinks "Britvic" and the brewers-competitors "Guinness" - joined the company Anheuser with full joint inventory management (VMI) between them and the Whitbread company. Also among the largest suppliers of the Whitbred company is the company "Bass"; with its technology of brewing and shares with the profits of pubs, which means that the company "Bass" At the same time, it is both a supplier, a competitor, and a customer of the Whitbread Company. Nevertheless, the company Bass carries out work aimed at acquiring the status of stock manager of the Whitbred company. The remaining major suppliers were planned to be involved in the VMI program by June 2000. The alignment of their main beverage suppliers is the main advantage of the Whitbread company, but the company is also exploring the possibility of expanding the VMI program to include raw material suppliers, increasing the number of VMI suppliers. To improve the coordination of work with suppliers, the Whitbread company invested heavily in the information EDI system.

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