The Collaborative Power of VMI 2.0

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1 WHITE PAPER The Collaborative Power of VMI 2.0 For more than a decade, out-of-stock rates have hovered at an average of 8 percent, according to a GMA/FMI Trading Partner Alliance report 1. More troubling still is that out-of-stock rates can nearly double during times of promotion. If an item is out of stock, revenue is not the only thing that is lost so too is loyalty. Today s consumers are quick to change stores or brands if the desired item is not available. One way to combat this problem, according to the GMA/FMI Trading Partner Alliance, is for retailers and suppliers to incrementally move toward a collaborative model that treats their joint supply chains as one. While this sounds like a daunting process, it doesn t have to be. Many retailers and suppliers have already started down this collaborative path by engaging in an inventory replenishment practice known as vendor-managed inventory (VMI). VMI is an established agreement between two parties, in which a supplier takes responsibility for managing a retailer s inventory levels at a particular location. While VMI agreements vary in scope and authority, essentially a supplier is given access to a retailer s data (e.g., inventory targets or outgoing warehouse demand). The supplier uses that data to calculate and/or write the purchase order (PO) on the retailer s behalf. Over the past few decades, the retailers and suppliers that have engaged in VMI have benefited from greater efficiencies and cost savings. However, the VMI process hasn t gone through any extensive re-engineering during this time. It remains a very tactical process and in many relationships, it s a continual process that repeats itself week after week. Now is the time to revitalize VMI; consumer behavior is changing rapidly, as is the pace of technology innovation, disrupting the value derived from the traditional VMI framework. In the next section, we ll take a closer look at how the modern-day consumer is forcing business partners to reexamine their VMI relationships.

2 The impact of the always-on consumer Millennials have eclipsed Baby Boomers as the largest generation in U.S. history, and the collective purchasing power and behavior of these digital natives is turning commerce on its head. These always-on consumers expect instantaneous access to information. Technology drives all of their activities: they shop online instead of in store, stream TV instead of buying cable, use their phones to scan checks into their bank accounts, take instructional classes online, and interact with friends via social media. At the same time, they are conscientious consumers when purchasing an item, where a product comes from (and the labor/ plant/farm conditions from which it was produced and sourced) is often as important as what the product is and how much it costs. Much has been documented about how these tech-savvy consumers expect a seamless brand experience across all channels. Regardless of whether they are shopping online, mobile or in store, they are not afraid to shop elsewhere if their needs are not met. As a result, companies are facing greater demand volatility than ever before, making it harder for businesses to respond to these consumers demands and remain profitable. Greater visibility and collaboration between retailers and suppliers is critical to surviving and thriving in this new consumer-centric environment. Adopting a new approach to the traditional VMI framework is the key to adapting to these new consumer expectations profitably. Opportunities to improve the value of VMI Let s examine the VMI process in more detail. Today, VMI sits primarily within the customer service organization, where planners execute orders to meet downstream demand. The traditional VMI framework, depicted in Figure 1, illustrates the relationship between participating companies. The associated processes often look like this: 1. The manufacturer leverages the outbound demand signal from the retailer warehouse. This demand signal can be provided by the retailer, or the manufacturer develops it based on their forecasting processes. 2. The manufacturer then develops a requirements plan back to its warehouse, while abiding by the agreed-upon retailer warehouse policies for inventory levels, lead time and ordering rules. 3. The manufacturer then utilizes the warehouse requirements plan to create a PO. The PO is integrated into the procurement system and processed along with the balance of orders received from many other customers. 4. Product is then shipped and received. RAW MATERIAL PLANT CONSUMER Retailer Planning Forecast consumer demand & calculate to the warehouse VMI Process Forecast retailer shipments, calculate to the warehouse & write order Internal Planning Forecast customer shipments & calculate to the factory Because there is limited visibility across the supply chain, we forecast what we cannot see. As a result, the value of these known components can be lost. Figure 1: Traditional VMI Framework

3 While this process has created efficiency and value between the two parties, there are still opportunities for improvement. Following are some gaps that still exist within the traditional VMI framework: The process is offline The offline nature of the data (meaning it is a calculation that lives outside of the daily supply planning calculation) can make retrieving and interpreting information difficult. Even when the data can be retrieved, the point-in-time nature of the data can make it outdated. Because of the offline nature of the VMI process, supply planners have a difficult time effectively leveraging the knowledge gained through VMI in their planning process. The process output The process horizon often resides in the execution window of order lead-time policies. This can create a couple of challenges: It adds executional value, but does little to enable better long-term planning. The process output is often the next order, providing limited visibility into the future. Integration There are a few challenges when it comes to integrating this data into supply chain planning processes: The short-term horizon of this data makes it of little value to supply planning, so the effort required to integrate doesn t always make sense. Because of the PO process, VMI doesn t always sit in the supply chain organization. It often resides in other parts of the organization, where the staff may not have the necessary skillset for supply planning. By addressing these gaps in the VMI process, retailers and suppliers will be one step closer to the collaborative operating model advocated by the GMA/FMI Trading Partner Alliance. While this may seem unachievable, it is now possible with VMI 2.0. Introducing VMI 2.0 VMI 2.0 is a connected planning landscape in which retailers and suppliers operate a single joint supply chain plan, providing both parties with a new level of visibility that enables them to truly understand the impacts of their short- and long-term decisions (see Figure 2). Process Impact of Calculating vs. Forecasting RAW MATERIAL PLANT CONSUMER End-to-End Planning Forecasting of an end-to-end plan that's generated daily Retailer Planning Forecasted consumer shipments are used to calculate warehouse orders VMI Process Warehouse orders are used to calculate orders from supplier warehouse Internal Planning Customer orders are used to calculate demand back to the factory Figure 2: VMI 2.0 How Visibility Across the Connected Planning Landscape Adds Value

4 If we take a look at Figure 2, VMI 2.0 addresses the three common gaps in the traditional VMI process that were highlighted earlier. First, it leverages existing supply chain data. Every supply chain variable such as store and warehouse inventory policies, transportation constraints, lead times, ordering rules, etc. are known by someone within the organization. The only variable across the end-to-end supply chain that isn t known is consumer demand. By making the VMI process part of the existing supply planning process, it removes the redundant and offline nature that many VMI processes have today. This enables trading partners to work from the same set of data, so that information about warehouse inventory levels and on-shelf availability can now influence decision making. Not only does this eliminate any data lag time, but it also increases productivity and reduces inventory waste across the supply chain. Second, the connected planning landscape extends the process horizon beyond a single-order executional process. With a consumer forecast projected over time, the supply plan can also be calculated over a longer period of time. The forward visibility inherent in a time-phased order schedule enables both parties to support more efficient planning, while also meeting strategic targets for service level, inventory and on-shelf availability. By connecting short-term and long-term planning, changes in either horizon can be better reflected and understood, enabling more effective tactical and strategic planning. This level of forward visibility also supports supply chain process improvements. Third, this connected planning framework integrates into the sales and operations planning (S&OP) process. By extending the horizon of joint VMI planning, integrating the demand drivers into each company s S&OP process will now be worth the effort. This enables both parties to use the same data to develop segmentation strategies for different products, regions or customer segments that can then be used to drive their comprehensive and customer-focused demand and replenishment plans. When tactics between the supplier and retailer can be translated all the way from the store back to the factory, a single joint plan is the result. This single set of numbers provides both parties with the visibility they need to truly understand the impact of their short- and long-term decisions. By engaging in this connected planning framework of VMI 2.0, both retailers and suppliers are positioned to reap significant top-line and bottom-line benefits (see Figure 3). Suppliers Reduced lost sales Lower out-of-stocks with improved forecast accuracy Improved space planning Optimized pricing and promotions Improved store execution Reduced price protection Lower weeks of supply Optimized pricing and promotions Improved launch margins Store clustering and pre-season assortments Better store-level monitoring of displays, promotions, segmentation and competitive moves Reduced promotions budget with improved ROI Improved promotion efficiency using improved lift analysis and store clustering Improved collaboration Forward visibility into promotion calendar and better service to retailers Retailers Increased sales Higher on-shelf availability Improved launch Better end-of-life management Better promotion effectiveness Increased margin Fewer markdowns Lower end-of-life expenses Improved cash flow With lower inventory levels Improved productivity Lower overheads in monitoring supply chain performance Reliable forecast and supply commits Vendor co-managing replenishment and forecasting Improved forecasting Forward visibility into promotion calendar and better service to consumers Figure 3: Benefits of VMI 2.0

5 Additionally, VMI 2.0 supports improved supply chain processes. Following are some examples. Greater planning efficiency through improved scenario planning Having a single model of the network in a safe, cloud-based environment allows for quick and shared scenario planning by both parties. This enables both companies to change supply chain planning parameters such as raising or lowering safety stock, removing a warehouse from the route to market, or changing transportation constraints and evaluate the results in the combined supply chain environment before it is carried out in a live environment. The ability to assess the impact and feasibility of different supply chain scenarios can help both companies identify opportunities for improvements. Ability to troubleshoot the root cause of common supply chain problems When supply chain parameters are identified, but the outcome is different than expected, figuring out the root cause can be difficult especially when each company is operating from different systems, plans and organizational priorities. However, a single model enables both parties to quickly identify the root cause because the calculations flow across a complete model. This also enables both parties to identify and prevent reoccurring problems, a key to continuous improvement. A reduction in waste A leaner supply chain produces higher inventory turns, which will drive down inventory levels across the supply chain. The benefits of VMI 2.0 can be quite substantial, and deployed quickly. For instance, a major wine manufacturer transitioned its distributor VMI program to JDA Flowcasting, and reaped significant results. The company deployed the solution in weeks during the busiest quarter of its business and achieved a near-perfect service level of 99 percent, while simultaneously removing close to 20 percent of its joint network inventory. Due to the success of the initial deployment, the manufacturing company is now rolling out JDA Flowcasting by state to support its distributor VMI program on a nationwide basis. In order to benefit from VMI 2.0, there is not a specific level of data sharing required. JDA Flowcasting can be leveraged using store-level data, but if that is not available, companies can still gain significant value using warehouse-level data. In fact, one of the most important first steps for supply chain partners is to build trust learning to trust the data, as well as the new skillsets required to understand and manage a time-phased plan. As each party gains confidence in using an endto-end model, both will benefit from supply chain improvements. Plus, the extended visibility will allow for better troubleshooting, solution management and communication between parties when challenges do arise. By embracing VMI 2.0, enabled by JDA Flowcasting, companies will benefit from an improved supply chain platform that extends value all the way from the supplier to the retailer, and ultimately, to the consumer. The collaborative power of VMI 2.0 VMI 2.0 is a journey toward greater collaborative relationships with your trading partners. The timing has never been more important, as it is imperative that retailers and suppliers start working more closely together to profitably deliver the customer experience today s consumers require. A good place to start is by creating a time-phased model of a joint supply chain with your existing VMI partnerships; this is now possible using JDA Flowcasting. 1. Solving the Out-of-Stock Problem, a FMI/GMA Trading Partner Alliance Report, jda.com/knowledge-center/collateral/solving-the-out-of-stock-problem jda.com info@jda.com Copyright 2017, JDA Software Group, Inc. All rights reserved. JDA is a Registered Trademark of JDA Software Group, Inc. All other company and product names may be Trademarks, Registered Trademarks or Service Marks of the companies with which they are associated. JDA reserves the right at any time and without notice to change these materials or any of the functions, features or specifications of any of the software described herein. JDA shall have no warranty obligation with respect to these materials or the software described herein, except as approved in JDA s Software License Agreement with an authorized licensee