RetailerSupplier Partnerships

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Retailer-Supplier Partnerships
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Outline

• Obstacles to logistics coordination
• Apparel industry and Quick Response
• Automotive industry and Lean Manufacturing
• Grocery industry and Efficient Consumer Response
• Continuous Replenishment
• Vendor-Managed Inventory
• Key learning from those industry initiatives

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Challenges in Logistics Management

• Challenges
• Poor information flow
• Poor customer services
• High paper intensity, low-tech interactions
• Missing, inaccurate documentations
• Lack of alternatives
• Scheduling difficulties
• High prices
• Lack of qualified people

Source 2001 Mercer Management Consulting Survey,
in concert with Optimum Logistics and theJournal
of Commerce
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Fragmented Information Sources
No One Has All!
FF/3PL
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Information Coordination The Bullwhip Effect
Consumer Sales at Retailer
Retailer's Orders to Wholesaler
1000
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600
Consumer demand
Retailer Order
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Wholesaler's Orders to Manufacturer
Manufacturer's Orders with Supplier
1000
1000
900
900
800
800
700
700
Manufacturer Order
600
Wholesaler Order
600
500
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300
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100
0
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0
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Apparel Industry and Quick Response (QR)
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Pipeline Mapping Fiber to End User
Processing - 60 days
Pipeline - 175 days
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Logistics Coordination Challenges in the Apparel
Industry

• Inaccurate forecast on consumer demand
• Forced markdowns (13 of net retail sales)
• Stockouts (6)
• Long apparel pipeline from design, planning,
  fiber sourcing, spinning, manufacturing, to the
  finished garments over a year in average
• Inflexible manufacturing practices
• Inventory carrying costs (5 of net retail sales)

The total cost of inefficiencies throughout the
apparel pipeline totals over 24 of net sales, or
over 25 billion in the US
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Quick Response (QR)

• QR was introduced in the US apparel industry in
  1985 and aimed at regaining the industrys
  competitiveness
• QR is a strategy for tying apparel and textile
  retailing operations to apparel and textile
  manufacturers to provide the flexibility needed
  to quickly respond to shifting markets
• QR strategy consists of a combination of business
  practices and technology

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Elements of an Ideal QR Systems

• Real-time merchandising
• Assortment planning to store and SKU level
• Assortment selection closer to selling season
• More frequent inventory review based on POS data
• An effective information pipeline
• Short-cycle, flexible manufacturing
• Instituting short-cycle replenishment

• Substitute Information for Inventory!

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QR Business Practices Changes

• Plan assortments closer to the selling seasons
  (CAD, POS), and to store and SKU level
• Narrowing assortments before the season through
  consumer testing and limited introduction
• Place smaller initial order and more frequent
  replenishment orders
• Review inventory frequently based on POS
  statistics
• Implement quality control programs to improve
  pipeline efficiency
• Share sales data and other key information across
  the chain
• Organize and provide necessary capital investment
  to improve manufacturing flexibility

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QR Technology Investment

• EDI to facilitate high volume and frequent
  information exchanges
• Adopt Shipping Container Marking (SCM) and
  implement barcode and barcode scanning technology
• Embrace computer-added design (CAD) and other
  advanced product development tools
• Implement flexible manufacturing technologies,
  like unit production system (UPS), electronic
  pattern-making, laser-based cutting technologies,
  computer-based monitoring, etc.

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QR Response time from Fabric at Mill to Product
in Store
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QR Examples and Benefits
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Apparel Industry Results with Modular
Manufacturing
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Automotive Industry and Lean Production Systems
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Challenges in the Automotive Industry (1980s)

• Volatile demand and high product variety
• Inaccurate forecasts
• Long product design, planning and implementation
  cycle
• High production investment and inflexible
  manufacturing system
• Focussed on cost minimisation
• Large production batches, long lead times
• High inventory levels
• Long and global supply chain with many
  bottlenecks Unreliable suppliers

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The Japanese Philosophy
Inventory hides the problems!
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Toyotas Kanban Concept in Manufacturing

• Kanban is a pull system which is driven by the
  demand at the lowest point in the chain
• Parts are fed to the assembly line in the just
  the quantity needed at the time they are needed
• By progressively reducing the Kanban quantity,
  bottlenecks becomes apparent. After removing the
  bottlenecks, the Kanban quantity is again lowered

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Lean Production Systems

• Lean production can be conceptualized as a
  tightly coupled, flexible system
• A philosophy of manufacturing that focuses on
  delivering the highest product quality at the
  lowest cost on time a production system with
  value stream focus
• Just-in-time (JIT) delivery and low inventories
  are the heart of lean production systems

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Achieving Lean Manufacturing

• Keeping inventory level low
• Maintaining level production
• Developing close relationships with suppliers
  (supplier development - gemba go and see!)
• Achieving JIT transportation and delivery
• Closer relationship with service vendors
• Incorporating quality programs
• setting stringent delivery requirements
• Adopting efficient loading method

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The Effect of JIT to a Companys Culture
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Grocery Industry and Efficient Consumer Response
(ECR)
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Efficient Consumer Response (ECR)

• First started in USA in 1993, graduated expanded
  to Europe (1994) and Asia (1999)
• Industry effort - driven by consumers demanding
  MORE for LESS, led by consulting firms - working
  together to fulfil consumer wishes better, faster
  and at less cost
• An initiative started with sharing information
• gradually, evolves to companies working
  together to integrate their operations and
  eliminate barriers that impact their ability to
  satisfy consumers drive out unnecessary costs -
  integrated retail supply chain

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ECR - Potential Collaboration Areas
Demand Side
Supply Side
Logistics Stock Mgt
Selling Category Mgt
Retailer
Barriers between trading partners
Enabling tech
Sales Mkting
Production Distrib
Manu-facturer
Barriers between internal functions
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ECR - Potential Collaboration Areas

• Demand management
• develop strategy and capability optimize
  assortments optimize promotions optimize
  introductions
• Supply management
• integrated suppliers reliable operations
  synchronized production continuous
  replenishment cross docking automated store
  ordering
• Enabling technology
• electronic data interchange electronic fund
  transfer item coding and database management
  ABC costing

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The Four Pillars of ECR
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Continuous Replenishment

• JITD (Just in Time Delivery),
• CRP (Continuous Replenishment Programme)
• CPFR (Collaborative Planning, Forecasting
  Replenishment) etc.
• Replenishment by supplier based on forecast or
  actual demand rather than Purchase Orders issued
  by the retailer
• Suppliers have some flexibility in the frequency
  and batch size of replenishment shipments, whilst
  maintaining pre-agreed inventory levels at
  retailers.
• Current CRP usually driven by warehouse
  withdrawal information. Long term aim to go for
  SKU level POS information
• Promotional volumes must be forecasted and
  handled separately.

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Information Infrastructure Required Technologies

• Basic EDI communication system
• Automated Receiving Technologies
• Supplier (e.g. using hand-held devices) build
  delivery invoice as product is being shipped.
• Automated invoices transmitted electronically
  from supplier headquarters and available to
  receiver, to verify shipment when delivery
  arrives and to close invoice.
• Perpetual inventory system
• Technology to share forecast information
• Technology to transfer promotional and one time
  orders
• Sales incentives will have to be transferred from
  shipment driven to consumption driven (EDLP
  between supplier and retailer)

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Transportation Infrastructure Cross Docking

• The movement of materials directly from receiving
  to shipping with minimum dwell time in between.
• Required information
• What is coming? How is it coming?
• Quantity and configuration? Markings and
  identifications?
• Where is it to be moved when unloaded? Interim
  and final destination?
• Any special handling?
• Advance Ship Notice (ASN) Key to improving cross
  docking efficiency

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Distribution Strategies

• Direct shipping
• Items are shipped directly from the manufacturer
  to the retailer (or to the customer)
• Examples Dell, JC Penney
• Shipping via warehouses
• Warehouses serve as intermediate stocking points
• Examples Most companies (HP, PG)
• Shipping via cross docks
• Cross docks serve as inventory coordination
  points
• Products spend less than 24 hours at cross docks
• Examples Wal-Mart, Home Depot, Costco

? Zhi-Long Chen
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Strategy 1 Direct Shipping
? Zhi-Long Chen
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Strategy 2 Shipping via Warehouse
manufacturers
retailers
manufacturers
retailers
warehouse
warehouse
Type 1. Without milk runs
Type 2. With milk runs
? Zhi-Long Chen
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Role of Warehouses

• Warehouses play important roles in the supply
  chain
• Position inventory closer to customer
• Consolidation function
• Consolidate shipments from multiple suppliers
• Consolidate shipments to multiple customers
• Even if firms sell products directly to customers
  (no retailers), they may still use warehouses
  (Example Amazon.com)

? Zhi-Long Chen
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Strategy 3 Shipping via Cross Docks

• Warehouses
• Receiving, Sorting, Storing, Order Picking,
  Shipping

• Cross Docks Warehouses without inventory
• Receiving, Sorting, Shipping

Receiving
Shipping
Sorting
Inbound shipments
Outbound shipments
Requires coordination IT support
? Zhi-Long Chen
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Comparison of the Three Strategies
Lead Time from mfg to retailer
Inventory at retailers
Transportation
Facility
Direct Shipping
Low
High
Short
High
Shipping via warehouses
High (warehousing cost)
Low
Low
Long
Shipping via cross docks
medium
Medium
Low
High
SSzSTDsqrt(L) L replenishment lead
time
? Zhi-Long Chen
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Why direct shipping has higher transportation
or/and higher inventory cost?

• Example
• Retailers weekly demand 1/2 truckload
• Shipping cost from manufacturer to retailer
  100
• Shipping cost between manufacturer/warehouse
  and warehouse/retailer 50

? Zhi-Long Chen
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Cross Docking
Shipping products without putting into storage
Retail outlets
Shipping Dock
Break bulk
Goods Arrived
Sortation
ADC (Automatic Data Collection) WMS (Warehouse
Management System) EDI (Electronic Data
Interchange) ASN (Advance Shipment Notice) Bar
Code Technology RF (Radio Frequency)
reduces inventory carrying costs as well as
storage space
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Vendor Managed Inventory (VMI)
Orders
Continuous
Replenishment
POS
activity
DC or store
Data
Manufacturer
Product Replenishment
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Background

• In 50s, U.S. Air Force flight line maintenance
  shops were maintained by the Base.
• VMI has existed for many years in several
  industries The beverage, chip and bread vendors
  restock the store's shelves themselves, relieving
  store personnel of the task of finished goods
  inventory management, including order placement.
• The same phenomenon took place in the textile and
  apparel industry supply chains.
• The vendor is responsible for replenishment and
  maintaining the customers inventory within
  specified limits
• "Who owns the inventory?" - the vendor retains
  title until the product is sold (or used).

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VMI Advantage to Suppliers

• Direct access to point-of-sales data
• significantly reduced uncertainties of sales
  forecasts
• better coordination of production, inventory, and
  delivery
• Reduced safety stocks
• Reduced pipeline inventory
• Higher/better service levels ?
• Reduced transportation costs due to suppliers
  ability to replenish at his convenience ?

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VMI Perspective from Retailers

• Pros
• Outsourcing procurement
• Lower inventory
• Better fill rates
• Reduced purchasing and inventory management costs
• Pushing inventory up the supply chain
• Pay for only what is needed, cash flow benefits
• Cons
• Risk of losing control
• More vulnerable to disruption
• Loss of core competency ?
• Sub-optimality, dumping of stock, ...

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Research Findings

• Impacts of replenishment leadtime
• If kept the same
• VMI benefits mostly the vendor
• The higher demand correlation over time, the
  higher VMI benefit (to the vendor)
• If reduced (more frequent deliveries)
• The benefit of VMI will transfer to the buyer

Manufacturer
Retailer
LT
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Research Findings (Contd)

• Impacts of the retailer characteristics
• The more retailers, the higher the benefit
• The more heterogeneous retailers are, the bigger
  the benefit (if a fairly large number of
  retailers served)
• With a few retailers, benefit of VMI is minor to
  the vendor

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VMI in Manufacturing

• Manufacturer (customer)
• issues blanket purchasing orders
• normally asks supplier to warehouse stock nearby
  when supplier is far away, may provide free space
  or requests supplier to rent space
• leaves for supplier to decide when and how much
  to ship to the warehouse - this is probably the
  only area where vendor manages inventory himself
• asks supplier to station a rep to coordinate JIT
  kind of delivery - JIT-II concept
• or asks suppliers to use a 3PL to manage
  warehouse and make local deliveries for them -
  supplier hub concept
• assumes ownership only when pulled out for
  production use
• arranges scraping end-of-product life inventory

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VMI in Manufacturing - Challenges

• Manufacturer (customer) driven
• It seems manufacturer gains at the increased cost
  of supplier, but
• supplier can benefit from information sharing as
  it is prerequisite of VMI
• supplier faces higher pressure to improve, to be
  more supply chain oriented
• in RD intensive manufacturing, VMI means early
  involvement by supplier (e.g. concurrent
  engineering), many benefits can be gained
• cost increase may be absorbable if volume is large

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VMI in Manufacturing - Challenges

• Barriers to success
• Velocityoptimizing the speed of material and
  information
• Visibilityin-transit and on-hand inventory
• Variabilitymitigation of demand variability
• The concept is good, the application is not
  proven
• Shifting the inventory problem...not solving it
• Not enough benefit for the component suppliers
• Risk is too high

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Retailer-Supplier Partnerships (RSP)

• Quick Response (QR)
• Supplier receives POS data from retailers
• Supplier use it to improve its own forecasting
  and
• production scheduling
• but retailer still prepares its own orders
• Continuous Replenishment (CR)
• Supplier replenishes retailers
• Supplier receives POS data and use it to
• prepare shipments at previously agreed upon
  intervals
• to maintain specific levels of inventory
• Vendor Managed Inventory (VMI)
• Supplier replenishes retailers
• Suppliers have the total control over
• replenishment decisions

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RSP Issues and Advantages

• Issues
• Inventory ownership
• Information systems (heavy investment)
• Mutual trust
• Confidentiality
• Ability to replenish
• Suppliers have more responsibility
• Sharing benefits
• Confidentiality (if a retailer deals with
  multiple suppliers -- another suppliers
  information may be important to its competitor)

• Advantages
• Improved forecasts
• Decreased inventory levels
• Lower lead times
• Lower variability
• Control bullwhip effect
• Improved service levels

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Why does RSP have those advantages?
Without RSP sequential, myopic optimization
Retailer optimizes its operations first. Then
supplier optimizes its operations subject to the
constraints imposed by the retailer.
Supplier
Retailer
Information flow
With RSP (particularly, VMI) Joint optimization
Customer
Supplier
Supplier optimizes its operations and the
retailers. This is system-wide.
Information flow
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Double Marginalisation -Example

• Tech Fiber produces jacket at v 10 and charges
  a wholesale price of c 100.
• Ski Adventure sells jacket for p 200. (Unsold
  jackets have no salvage value (s 0).)
• Demand is uncertain and not known when
  purchase/production decisions made.
• At this price, demand is estimated to be normally
  distributed with mean 1000, and standard
  deviation of 300.

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Tech Fiber/Ski Adventure Example

• For retailer (SA), solves a Newsvendor problem
  order Q s.t.
• CSL Prob (Demand
• SA orders 1000 jackets.
• Expected profit for SA is 76,063.
• Profit for TF 1000(90) 90,000.
• Total Supply Chain profit 166,063.
• But
• Total supply chain profit is 10090 190 !
• For the supply chain as a whole, the optimal
  order/production quantity is one that gives a
• CSL (200 10)/(200) 0.95, that is Q 1493.
• Total supply chain profit is 183,812. (More!)

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Double Marginalisation

• If each party makes decisions considering only a
  part of the supply chain, the decisions may not
  maximize supply chain profits!
• Incentives to retailers to order quantities
  that increase supply chain profits
• Buy-back contracts A manufacturer specifies a
  wholesale price and a buyback price at which the
  retailer can return any unsold items at the end
  of the season
• Revenue sharing contracts The manufacturer
  charges the retailer a low wholesale price and
  shares a fraction of the revenue generated by the
  retailer
• Quantity flexible contracts Manufacturer allows
  retailer to change order quantity after observing
  demand

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Buyback Contracts
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Summary

• Quick Response
• JIT
• CRP and VMI
• Cross-docking
• Benefits of supply-chain co-ordination
• Infrastructural support for logistics
  co-ordination