Continuous Replenishment and Vendor-Managed Inventories in a Supply Chain

Information distortion can be dampened by practices that assign replenishment responsibility across the supply chain to a single entity. Replenishment decisions made by a single entity ensure visibility and a common forecast that drives orders across the supply chain. Two common indus­try practices that assign a single point of responsibility are continuous replenishment programs and vendor-managed inventories.

In continuous replenishment programs (CRPs), the wholesaler or manufacturer replen­ishes a retailer regularly based on POS data. CRP may be managed by the supplier, distributor, or a third party. In most instances, CRP systems are driven by actual withdrawals of inventory from retailer warehouses rather than POS data at the store level. Tying CRP systems to ware­house withdrawals is easier to implement, and retailers are often more comfortable sharing data at this level. IT systems that are linked across the supply chain provide a good information infrastructure on which a CRP may be based. In CRP, inventory at the retailer is owned by the retailer.

With vendor-managed inventory (VMI), the manufacturer or supplier is responsible for all decisions regarding product inventories at the retailer. As a result, the control of the replenish­ment decision moves to the manufacturer instead of the retailer. In many instances of VMI, the inventory is owned by the supplier until it is sold by the retailer. VMI requires the retailer to share demand information with the manufacturer to allow it to make inventory replenishment deci­sions. This helps improve manufacturer forecasts and better match manufacturer production with customer demand. VMI can allow a manufacturer to increase its profits—as well as profits for the entire supply chain—if both retailer and manufacturer margins are considered when making inventory decisions.

VMI has been implemented with significant success by, among others, Kmart (with about 50 suppliers) and Fred Meyer. Kmart saw inventory turns on seasonal items increase from 3 to between 9 and 11, and for nonseasonal items from 12 to 15 to 17 to 20. Fred Meyer saw invento­ries drop by 30 to 40 percent while fill rates increased to 98 percent. Other firms with successful implementations include Campbell Soup, Frito-Lay, and P&G.

One drawback of VMI arises because retailers often sell products from competing manu­facturers that are substitutes in the customer’s mind. For example, a customer may substitute detergent manufactured by P&G by detergent manufactured by Unilever. If the retailer has a VMI agreement with both manufacturers, each manufacturer will ignore the impact of substitu­tion when making inventory decisions. As a result, inventories at the retailer will be higher than optimal. In such a setting, the retailer may be better positioned to decide on the replenishment policy. Another possibility is for the retailer to define a category leader from among the suppliers and have the category leader manage replenishment decisions for all suppliers in the category. Walmart follows such a practice and assigns a category leader for most of its products. Walmart sets the targeted level of product availability across all products and the category leader designs replenishment policies that achieve these levels. This ensures that the category leader is not favoring any one supplier’s product over another. For example, HP was Walmart’s category leader for printers and managed all printer replenishment.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.