University of Groningen
Vendor-managed inventory in fresh-food supply chains
Post, Roel
DOI:
10.33612/diss.130028783
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Publication date: 2020
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Citation for published version (APA):
Post, R. (2020). Vendor-managed inventory in fresh-food supply chains. University of Groningen, SOM research school. https://doi.org/10.33612/diss.130028783
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Consumers expect stores to be filled with full shelves of ever more and fresher pro-ducts. This imposes a large challenge for the supply chains that make this possible. At the core, supply chains fulfill two important functions: a physical function and a marked mediating function. The physical function aims at efficient production and transport of products between each link in the supply chain. The better these proces-ses are adjusted to each other, the more efficient machines, trucks and other means can be utilized. The market mediating function ensures a good balance between product availability and the costs involved to make these products available, taking into account uncertainty in demand. Too little inventory leads to empty shelves, lost sales, and dissatisfied customers; too much inventory induces high inventory costs and possible spoilage of fresh product. The supply chain as a whole performance optimally if maximum product availability is realized against minimal production, transportation and inventory costs.
The control of chain involves many decisions on production, transportation and inventory levels of products, but also setting prices and promotions. Often, these responsibilities are divided such a way that the retailer is responsible for setting in-ventory levels and placing orders at the suppliers to replenish these inventories. The supplier then produces the products and transports them to the retailer. In more and more supply chains, Vendor Managed Inventory (VMI) is used. The idea be-hind VMI is that it is more efficient to not spread responsibly for production, trans-portation and inventory decisions over retailer and supplier, but to centralize these decision (to a greater extent) at a single organization, in this case the supplier. This means the retailer no longer places orders at their suppliers, but the supplier controls the inventory levels and deliveries to the retailer.
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By closely studying earlier VMI studies and implementations, this thesis shows that VMI is not a uniform concept that is always applied in the same way. VMI consists of a collection of different components that can be applied together or on their own, and each hold the potential to improve the performance of the supply chain. The first component is sharing information on inventory levels and (expected) demand, which provides suppliers insight into the most actual state of the supply chain. Information sharing is also possible without VMI, but forms a condition for any form of VMI. The second component is transferring control of inventory levels from the retailer to the supplier, which allows the supplier to improve connection between processes in the supply chain. This component is the core of VMI and ena-bles the supplier to take control of the supply chain. Finally, also the ownership of inventories can be transferred to the supplier. This ensures the supplier not only con-trols the inventory, but also incurs the (financial) impact of these decisions. Aligning control and ownership of inventory can motivate the supplier to act in the interest of the supply chain as a whole.
This thesis studies in detail how suppliers can use the freedom and responsibi-lities that VMI provides them, and how this affects the performance of the supply chain. Studies that use data to infer if, and which, advantages actually occur after implementation of VMI in practice are scarce. Moreover, earlier studies almost ex-clusively use data from a single large and powerful supplier who introduced VMI for all or some of its buyers. An example of this is the Campbell Soup Company, a large multinational, introducing VMI for some of their buyers with the aim to re-duce inventories in the supply chain. There are relatively view suppliers as large and powerful as the Campbell Soup Company. Most suppliers are smaller organiza-tions who are not powerful enough to initiate large improvement processes such as VMI. Therefore, in many cases it will be the retailer that initiates VMI for many of their suppliers. This thesis shows that these suppliers have a different view on VMI, which also has consequences for the outcome of a VMI implementation. We use objective measures, such as inventory levels and product availability, but also sub-jective aspects, such as the motivation and expertise of suppliers to improve supply chain performance.
Where suppliers in earlier studies focused strongly on minimal inventories, sup-pliers in a VMI implementation driven by a retailer focus especially on product avai-lability and efficient use of their production and transportation resources. In the first
weeks after introduction of VMI we observe a strong ‘startup effect’, where supply chain performance decreases, but, after that, suppliers improve performance conti-nuously up to a year to levels above those before introduction of VMI. The strong focus on product availability is driven by strong competition among suppliers; in case of empty shelves customers will switch to the product of a competitor. More-over, efficient production is of high importance for these suppliers, in part because this ensures rest in their (business) operations. If it is possible to produce and ship products in large quantities, for instance because products are non-perishable, they are willing to take a little increase inventory cost.
By zooming in on how suppliers improve product availability, our study shows two different ways to improve product availability: 1) By increasing integration bet-ween production and transportation processes without additional inventory, or 2) using production and transportation resources more efficiently by means of additio-nal inventory. Using transaction data of 56 suppliers, a mediated regression model, that especially designed to distinguish between these two ways, describes how these suppliers use VMI. By also taking into account the properties of suppliers, the mo-del shows that suppliers choose the way that best fits their products and processes. Products with limited shelf life and/or products that experience strong uncertainty in demand are characterized by more ‘complex’ inventory processes. For these pro-ducts, setting up an inventory process that is seamlessly integrated with demand can be challenging. However, in particular for these more complex inventory processes suppliers choose for seamless integration, suggesting the advantages outweigh the higher investment. For products that gain less from seamless integration, suppliers choose a more straightforward way to improve product availability – at which they also benefit from improved utilization of their resources: utilizing economies of scale provided by larger production and transportation batches and avoiding expensive last-minute deliveries by keeping a little more safety stock.
After introduction of VMI strong differences occur in the extent to which sup-pliers improve product availability. These differences in supply chain performance lead to a central question that is often put forward in supply chains: are the dif-ferences caused by suppliers’ dedication to invest in the collaboration or by their expertise to implement something as complex as VMI successfully? By studying eight suppliers closely during and after the VMI implementation patterns occurred in how suppliers with different characteristics developed themselves. If suppliers
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lack important expertise at the start of the VMI implementation this can lead to two different problems. In case of complex inventory processes, for example because pro-ducts only have a shelve life of a few days, limited expertise can lead to underestima-tion of the potential improvement that can be obtained with VMI. At the same time, also the investment and knowledge necessary to successfully implement VMI can be underestimated. This can cause a strong loss of supply chain performance after introduction of VMI. However, because it is possible to gain performance with VMI, this loss can be recovered in the long term if the necessary investment is made after all. In case of relatively straight forward inventory processes, for example because products have long shelve live and stable demand, suppliers sometimes overesti-mate what can be gained with VMI. This can lead to (too) large investments at the start. If the intended results are then not realized, this can lead to disappointment and lack of effort in the long term. This is regrettable, because if a supplier whose potential gain of VMI is limited also limits its investment, the VMI implementation still be successful also for this supplier.
All in all, we can conclude that VMI is a versatile combination of instruments and can be used in multiple ways to improve the performance of a supply chain. How VMI can be used best depends strongly on the products, processes and organizations of the suppliers involved. Because these characteristics can differ strongly also im-plementation of VMI can result in different (positive) outcomes. This thesis shows that VMI is not only useful as a tool to reduce inventories, but also – and maybe even more so – to improve product availability. This way, the research emphasizes the importance of allowing suppliers the freedom to really take control of the supply chain. Meanwhile, coaching from the retailer can help to prevent disillusions caused by over or under investment.
