Vendor-managed inventory and distribution planning in the food and beverage industry - here's something to chew on

The Food Packaging Trends and Advances report from PMMI forecasts that the US Food and Beverage industry will experience a 2.9 % CAGR through 2022. The report also mentions that the global growth rate is almost double that of the US food industry. It’s a prediction that shouldn’t be ignored.

Food for thought: Time for a different kind of supply chain

Continued economic growth, customer preferences (especially those of the millennial generation), the rise of ecommerce and the Amazon channel, increased product choices and newer product categories in the marketplace are all driving the need for efficient and effective supply chain networks to support customer demand. Among the many supply chain initiatives taking place today, vendor-managed inventory (VMI) has become an increasingly effective process and business model to help organizations share risk and information between vendors and customers — while benefitting from lower stockouts, reduced uncertainty and lower costs. As with any industry, food and beverage faces its own unique set of supply chain challenges, including:

• Expiring ingredients, manufactured product and packaged goods
• Changing customer preferences and the need to continually “stock” the shelf
• Marketplace competition, too many choices and newer fads (e.g. craft going global in the alcoholic beverages industry)
• Ever-increasing demand volatility
• A demanding distribution network comprised of producers, distributors and retailers
• Regulatory and legal restrictions, and safety and quality issues
• New Product Introduction (NPI) management

Not surprisingly, each challenge requires its own focus, strategy and best practices to overcome. Now, let’s take a closer look at what VMI is and how it can address some of these challenges through best practices.

What is vendor-managed inventory?

VMI is the process whereby a supplier or vendor manages and replenishes inventory at a customer’s location at the levels required by the customer. The customer shares data such as point of sale (POS) data, customer forecasts, current inventory levels, and inventory target levels, which will be used to develop an appropriate distribution plan by the vendor. The vendor is usually the supplier, a manufacturer or a distributor. The benefits of the vendor-managed inventory process include:

• Enhanced visibility for vendor
• Lower order volatility
• Higher customer satisfaction
• Reduced order lead times
• Better transportation planning

The VMI concept is well documented with a real-world example in Michael Hammer’s best-selling book, Reengineering the Corporation.

Walmart and Pampers: A real-world VMI story

Let’s take a closer look at a vendor-managed inventory case study. Traditionally, Walmart managed its own Pampers (disposable diapers) inventory. However, when the company realized that inventory management is a costly activity, it approached Pampers manufacturer Procter & Gamble (P&G) to manage inventory at P&G’s distribution centers. Through this arrangement, Walmart would tell P&G how much stock was moving out the distribution centers to its stores; P&G would identify how much to replenish and when. This approach worked so well that it developed into a strong win-win relationship between both companies. Here’s how… Walmart offloaded into replenishment function to its supplier, leading to decreased costs, reduced stockouts and lower inventory levels. P&G gained improved visibility into its customer demand, and better supply chain and manufacturing planning led to reduced order lead times. On the storefront, P&G benefitted from additional shelf space and preferred end aisle displays.

VMI best practices at a glance

Here are some best practice guidelines for the food and beverage industry to consider when addressing its own unique challenges.

Maintaining optimum inventory levels

• Maintain optimum safety stock at all the right points in the multi-echelon supply chain network. If there is too much inventory at any point, you risk having unused, unprocessed inventory subject to perishability, safety and quality controls or obsolescence. If there is too little inventory, you risk not having product on the shelf and losing market share, or increased costs for expedited shipping.
• Give suppliers/vendors visibility to safety stock and inventory levels at the customer or distributor locations.
• Provide visibility to customer demand, which helps to stabilize the vendor’s own manufacturing planning.
• Enable the sharing of information traditionally considered sensitive and confidential data to maintain optimum inventory levels.

Dealing with demanding distribution networks

• Understand transportation and logistics constraints, and work with third-party logistics suppliers and shippers to gain more visibility into the process.
• Plan for disruptions. For example, analyze the impact of late deliveries, transportation constraints such as driver shortages, and weather disruptions.

Optimize to reduce transportation spend, while maximizing shipment efficiency. This includes understanding cost drivers, and product flows and lead times; defining service levels; and performing cost analysis and optimization.

Managing SKUs effectively

• Understand how and when SKUs transition from an old to a new product at both the vendor and customer stage.
• Visibility to new product introductions is critical across the supply chain for both the vendor and distributor.
• Understand the effects of material expiry and how it impacts every node in the supply chain model. Material expiry can affect not only the raw material, but also the finished product and the packaged product. Understanding this and having the capabilities to model this into supply chain planning is vital in the food and beverage industry.
• Integrate distributors’ NPI processes into vendors’ manufacturing and distribution plans to ensure you can replenish the right quantity of the right product at the right time.

Building relationships

• Develop closer relationships with customers and suppliers.
• Ensure supply chain planners and buyers have a closer relationship than the traditional siloed approach.
• Hire or retrain talent for the right skills.
• Take a “we all win” collective approach instead of an “only I win” approach.
• Ensure clear and objective communication between companies. For example, jointly develop performance management metrics so that any adopted strategies benefit all parties involved — not just a single entity.

Choosing technology that enables you to:

• Transmit data in real-time or near real-time across companies.
• Allow for collaboration between planners and buyers.
• Perform scenario planning, including planning for supply chain disruptions (constrained manufacturing or transportation) and events and promotions (demand volatility).
• Real-time transportation visibility and transportation optimization.
• Translate SKU languages between vendors and the customer.
• Plan around perishability and material expiry through the supply chain network.

In closing... some words about VMI and the food and beverage supply chain

In today’s food and beverage supply chain, success demands ensuring the right product is on the shelf at the right time. Retailers are selling more brands than ever. Distributors have a huge responsibility to stock the right inventory and improve forecast accuracy — all while reducing obsolescence and waste, managing quality and adhering to regulatory and legal restrictions. Suppliers are under more pressure to reduce lead times, improve quality and reduce costs. Finally, logistics and transportation companies must provide more visibility to their freights while struggling through a shortage of qualified commercial drivers. I’m not promising that VMI is the ultimate answer, but it is one giant step in the right direction. VMI can help ensure you build the right relationships, product is always available when it should be and customers don’t walk away dissatisfied. Do you have any VMI real-world stories or use cases? I’d love to hear your thoughts.