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A matter of just in time

A collaboration between vendor and customer to achieve both operational and financial benefits also brings with it the opportunity to move towards a highly beneficial vendor managed inventory model.

The traditional inventory models have vendor and customers managing their individual inventory levels with focus on forecast accuracy and sales history and attempting to maintain stock levels based on this knowledge. This can create high inventory levels, particularly where shelf life is it a concern , forcing them to keep low runner products for that “what if” order moment, tying up precious cash flow in potentially unsellable and/or obsolete product. Visibility across material availability/shortages and inventory levels does not exist and it’s every man for himself, with each vendor keeping a close eye on those delivery in full on time numbers.

Vendor managed inventory across the supply chain is often seen in industries like Automotive. Here, Just In Time manufacturing goes hand in hand with the “pull” model replenishment systems that come with vendor managed inventory. This system sees replenishment rates established on understanding true customer consumption and optimal stock levels understood, and combining this with existing knowledge of seasonal variances and sales history. Short lead times become crucial in such Just In Time environments, where flexibility is crucial and model mix is not forecast far into the future, likely because sales history is not indicative enough due to new models and market flux. This need for short lead times is mirrored in food industries where the increase of demand of fresh and to-go products means now is the time for FMCG to see themselves move into this Just In Time environment. More than ever, the need to shorten the time between paying and getting paid (i.e buying produce and delivering product) is key to fresh product success.

In a vendor managed inventory system, the supplier is ultimately responsible for tracking and replenishing the customers inventory, but for this model to succeed, the risk of shortages must truly be a shared liability. There is no “us and them” mentality and no one blames upstream processes or supply for shortages that affect their own bottom line. We are all critical links in the chain.

Frequent communication and transparency of data becomes key, with emphasis on a “all for one and one for all” approach, with each link understanding its role. Supply chains need to think of themselves as an eco-system, with each player holding a crucial role in sustaining the balance, and the consequence of one link failing is that the entire eco-system fails.

Vendor managed inventory models are more transparent, using fewer inventory locations and truck movements to sustain optimal stock levels for longer life products. Shipping can be planned on previous week, day, shift or even hourly consumption rather than batch order placement, with milk-run delivery or bus-stop style logistics, instead of large batch dock-to-dock mentality. In fresh produce systems, this becomes a crucial enabler to reduced lead times and gaining additional shelf life. The benefits for the ambient players are also the lower inventory levels and inherent flexibility to ebb and flow with the complex seasonal consumer demands.

The formation of such a collaborative system requires some effort up front, as any good relationship does, with the sharing of information and the gaining of trust. Learning to see the supply chain as an integrated network will require communication lines to be established and remain open, and may require the literal data networks between businesses to be integrated. Forecast and planning spreadsheets become as redundant as fax orders, and enterprise resource planning giants should no longer concentrate on just managing processes/operations but rather move towards establishing and sustaining integration between businesses.

We estimate the benefits of vendor managed inventory could be between $2-5bn in the Australian FMCG sector offering significant cost savings and as Paul Eastwood mentioned in his article creating a new paradigm for the world to follow.

Image a supply chain where products are moved only once after manufacture allowing these businesses to focus on their key strength of making great products efficiently, the retailers can drive shareholder value through vertically integrating into warehousing services which is a space which should be a core competence. Logistics providers focused on vehicles and distribution networks, leaving 3rd party warehousing businesses at risk of demise.

As an example, Coles and Woolworths combined turnover is over $75 billion meaning releasing five days of stock holding in the end to end network could free up a $1bn to invest back into the sector.

Written by Monita Broughton, Consultant. First published by Inside FMCG, download the full report here. https://insidefmcg.com.au/toward-2020/