BestPracticein

ImplementingVMI
ArecommendationbyECREurope

BestPracticeinImplementingVMI
ArecommendationbyECREurope

ECREurope
ECREuropegatherstogetherallvaluechainpartners:retailers,manufacturersandserviceproviders,whoshare
acommonbeliefthatbyworkingtogetheronnoncompetitivematterswecanbringtransformationalchange
toourindustrythatbenefitsourshoppersandconsumers.
Asharedvision:WorkingtogethertocreatevalueforconsumersinasustainablewayBetter,fasterandat
lesscostwithasharedbusinessprocessleadingtosharedbenefitsacrosstheValueChain.

This handbook is primarily aimed at supply chain professionals in retail industryfor Supply Chain, Logistics and IT
professionals. The manual is partly based on GS1 Switzerland Merchandise Planning Models Guidebook, published in
2013 and was completely reworked in 2014 under ECR Europe initiative by group of experts lead by Hele Hammer,
AssociateProfessoratTallinnUniversityofTechnology.

Contents
ExecutiveSummary.................................................................................................................................................4
1. WhatisVMI.....................................................................................................................................................5
1.1. VMIprinciples..........................................................................................................................................5
1.2. VMIusageinEurope................................................................................................................................6
1.3. VMIModels:DistributionCenterversusDirectStoreDelivery...............................................................6
2. VMIsetupprojectsteps..................................................................................................................................8
2.1. EvaluateVMIBusinessCase...................................................................................................................10
2.1.1. BenefitsofVMI...............................................................................................................................10
2.1.2. CostBenefitAnalysis:VMISavingsCalculator...............................................................................11
2.1.3. Riskanalysis....................................................................................................................................14
2.2. PlanVMIproject:timeandresources...................................................................................................15
2.2.1. VMIprojectschedule......................................................................................................................16
2.2.2. VMIprojectorganisation................................................................................................................16
2.2.3. Projectteamskillsandresponsibilities..........................................................................................17
2.3. SelectVMItargetcategoriesandproducts............................................................................................18
2.3.1. WhichsupplierstoincludeinVMIprogram?.................................................................................19
2.3.2. Min/MaxstocklevelsforVMIproducts.........................................................................................20
2.3.3. Determiningdeliveryunits/DCVMIfulltruckloads......................................................................21
2.3.4. ProductMasterData......................................................................................................................23
2.4. Terms:SetGoalsandTerms(VMIContract)..........................................................................................25
2.4.1. KPIsformeasuringthesuccessofVMIproject.............................................................................25
2.4.2. VMIContractbetweenvendorandretailer...................................................................................28
2.5. AlignITandbusiness..............................................................................................................................29
2.5.1. Internalandexternalbusinessprocesschanges............................................................................29
2.5.2. VMIprocessandEDIdocuments....................................................................................................30
2.5.3. VMItechnologicalsolution.............................................................................................................32
2.5.4. SetupandtesttheVMIsolution....................................................................................................34
2.6. Rollout:PilotandOnboardPartners....................................................................................................36
2.6.1. PilotyourVMIprogram..................................................................................................................36
2.6.2. Trainandgolive.............................................................................................................................36
2.6.3. Onboardadditionaltradepartners...............................................................................................38
3. VMIperformanceandcontrol.......................................................................................................................38
3.1. ReviewandAdjust.................................................................................................................................38
3.2. MonitorongoingVMIprograms............................................................................................................39
3.3. ITsolutionsforKPImonitoring..............................................................................................................40
4. CriticalSuccessFactorsforVMIprojects......................................................................................................42
4.1. BusinessRelationshipfactors................................................................................................................42
4.2. Companyinternalfactors......................................................................................................................43
4.3. TechnicalandVMIspecificfactors.........................................................................................................43
APPENDICES..........................................................................................................................................................45
Appendix1.ECRthinking..................................................................................................................................45
Appendix2.VMISampleContract....................................................................................................................46
Appendix4.MasterDataManagement:Background......................................................................................49
Appendix5.Glossary........................................................................................................................................51
Appendix6.Demosoverview/VMIserviceproviders.....................................................................................54

ExecutiveSummary
Vendor Managed Inventory (VMI) is a replenishment strategy where the traditional ordering process is
eliminatedandthesupplierhastherightandresponsibilitytomakestockreplenishmentdecisionsbasedon
regular automatic inventory and / or sales data from buyer. This handbook on VMI contains instructions for
practitioners, explaining automated replenishment processes and providing support for project managers in
implementingVMIreplenishmentprocesses.
The decision to implement VMI is a strategic decision impacting many departments (logistics, procurement,
planning, sales and marketing) and strengthening cooperation between supplier and buyer. The aim of this
collaborationistomakethereplenishmentprocessmoreefficientatlesscost.

BusinesscaseforVMI
VMI programs offer the potential for dramatic improvements in supply chain and financial performance.
Replenishment decisions are made by the supplier based on agreed key performance indicators (KPIs),
including availability and stock turnover. Quantitative performance improvements that customers using VMI
haveachievedinclude:
Increaseinavailabilityof25%,(andrelatedincreaseinsalesrevenues)
Reductionininventorylevelsof15to40%(andrelateddecreaseincapitalcosts)
Additional benefits include less OOS, more efficient production scheduling, improved responsiveness to
customerneedsandchangingmarketconditionsandbetterrelationshipswithpartners.
Thefollowingruleofthumbapplies:thebiggertheshippingvolumewiththebusinesspartneristhegreaterare
the percentagebased potential savings. It is estimated that savings up to 23% of total turnover can be
achievedwithVMIprogram,ifappliedcorrectly.

VMIsetupprojectsteps
Infirstchapter,the6majorstepsinaVMIimplementationprojectareexplainedindetail.

CriticalSuccessFactorsinVMIProjectImplementation
SuccessfulVMIprojectsarebasedonanumberofkeyfactors:thecommitmentofseniormanagementfrom
both buyer and vendor organizations; welldefined agreements on goals, service levels, and risks; and tight
integration with systems. With these elements in place, good communication and change management
practicescanhelpyouoverthefinishline.
Conclusionsfroma2014masterthesisdefendedatTallinnUniversityofTechnology,askingforexpertopinions
from theECRmember companies in Europe about whatare thecritical successfactors forVMI Projects, are
presentedinchapter4.

LotofPracticalTipsandTricksinAppendices
TipsforprojectorganisationandimplementationandvariouschecklistsaswellasasampleVMIcontractare
included.

1. WhatisVMI

1.1. VMIprinciples
Supplychainsmustbemanagedtoensurethatallsupplychainparticipantsarealignedregardingdemandand
agreedinventorylevels,andthereisareliablereplenishmentprocesstosecureproductavailabilitythroughthe
entiresupplychainatthelowestpossiblelogisticscosts.
Vendor Managed Inventory (VMI) is an alternative to the traditional orderbased replenishment practice,
beingamoreefficientsupplychainintegrationstrategyandcollaborationconcept.InaVMIrelationship,the
supplierisempoweredtomanagecustomersinventoryandreplenishthegoodsatcustomersiteautomatically
underagreedconditionsandrules.Insteadofsendingthepurchaseorders,retailerssendinventoryandsales
informationelectronicallytosupplier.Basedonthisdemanddata,suppliermakesperiodicresupplydecisions
regarding order quantities, shipping, and timing (see Figure 1). The information about real demand will be
transparenttothevendor,reducinguncertaintyforitsproductionandoperationalplanning.

Figure1.ReplenishmentprocesswithVMI
Electronic Data Interchange (EDI) is used for exchanging relevant trade documents to ensure completely
automatedorderprocessing.Thisisassociatedwithinvestmentononehandandsavingsandefficiencygains
ontheother.
VMI is a tool which facilitates efficient processes in inventory management. The aim of VMI is to ensure
availabilityandfreshnessatthepointofsalewiththelowestpossiblelogisticscostsandmaintainingthelowest
possibleinventorylevelacrosstheentirepurchasingchain.
Thisisonlypossibleifallpartiesspeakthesamelanguage,shareanunderstanding,applythesamestandards
and methods and work together on a constructive basis. In any case, commercial pressure in the consumer
goods industry will force companies to further streamline their purchasing processes, in order to achieve a
sustainedincreaseinefficiencyandprofits.
VMIgivesthesupplierbothresponsibilityandauthoritytomanagetheentirereplenishmentprocess.
Thechangeisfundamentalbymakingtheavailabilityandinventoryturnoverthenewprimarymeasuresofthe
suppliersperformanceinsteadofdeliverytimeandpreciseness.
ThenatureandextentofVMIimplementationisnotanITprojectortopmanagementprerogativeimposingon
the rest of the organisation. A VMI project is in fact a major effort that will require participation from most
departmentsoftheorganisationandwillinfluenceandchangeallofthedimensions.Therefore,Itisnecessary

toemployaholisticviewofstrategy,structure,people,andtechnology.

1.2. VMIusageinEurope

ECRNI

Established

LocalECRmembers

Marketshare1 VMIpenetration

RetailersSuppliers Total
ECRSwitzerland

1999

15

120

135

90%

5075%

ECRFrance

1997

17

45

59

90%

5075%

ECRAustria

1996

12

63

75

95%

1025%

ECRItaly

1993

14

46

60

80%

1025%

ECRBaltics

2007

12

16

50%

<10%

ECRIreland

1985

40

46

60%

<10%

ECRPoland

1998

11

19

30

60%

<10%

ECRRussia

2004

15

38

53

50%

<10%

ECRSpain

1997

15

50

65

50%

<10%

ECRUK

1996

14

23

72%

<10%

ECRPortugal

2002

20

23

N/A

<10%

TOTAL
121
467 588
1
marketshareofECRmembersontheirrespectivemarkets(FMCGretail),aroughestimationbythelocalECR

1.3. VMIModels:DistributionCenterversusDirectStoreDelivery
In big countries of central and western Europe, large mature retailers are using retailer distribution centers
(DC) in their operations as a rule. In Eastern Europe and smaller countries, directtostore (DSD) delivery is
prevailing.AccordingtotheECREuropesurveycarriedoutinfall2014,theexpertsestimatetheshareofDC
deliverytoincreaseinnext5to10yearstobecomethedominantmodelofoperation1.RegardingVMI,there
aresomedifferencesbasedonwhetherthesupplierisdeliveringtoDCordirecttostores.

VMIbetweenVendorandBuyerDC
ThemajorityofVMIprogramsarefocusedonmanaginginventoryatthedistributioncentrelevel(seeFigure2).
Vendorswillgetregular(usuallydaily)productinventoryandsalesdatafromtheBuyer.Foreachitem,thereis
information about how many units are in warehouse, how many were delivered to stores, how many are in
transit. Based on agreed minimum and maximum stock levels, the Vendor will make product replenishment
decisions, aiming to ensure availability and at the same time optimizing transportation (benefiting from full
truckloads).

1Nualassurvey

Figure2.VMItobuyersdistributioncentre(warehousedelivery,DC)

VMIbetweenVendorandBuyerindividualstores(DSD)
WhilemostoftheVMIrelationshipsarebetweenVendorandBuyerDC,thereareagreementswherevendors
aremanagingtheirproductsattheretailstorelevel(seeFigure3).InDSDVMI,individualshopssenddailyPOS
(pointofsales) data and regular inventory data to Vendors. Similarly to DC VMI, Vendor and Buyer have to
agreeminandmaxstocklevelsforeachitemineachstore.Usingdynamicminandmaxstocklevels(inDSO
ratherthanunits,readmoreinchapter2.4),thisagreementismanageable.BasedonPOSdata,Vendormakes
replenishmentdecisionsanddeliversproductstoshops,ensuringavailabilityandoptimizinginventorylevels.

Figure3.VMIdirecttostores(directstoredelivery,DSD)
IncontrarytoDCVMI,insteadofpotentialsavingsintransportationcosts,DSDVMIwillmorelikelyincrease
transportation costs for the supplierdeliveries are smaller and more frequent. However, increase in
availability, freshness and therefore, sales, usually more than offset the cost increases. DSD VMI model also
requires much more sophisticated systems on both Buyer and Vendor side and high level capabilities on
Vendorside.

VMIversusCMI(CoManagedInventory)
Inadditiontodifferencesinoperatingmodel(DCversusDSD),therearevariationsofVMIdependingonwhere
therightandresponsibilityofreplenishmentdecisionslay.
InDSDVMI,usuallyretailershavedefinedproductassortmentsandplanogramsandallowvendorstomake
replenishmentdecisionsinthatframework.SomeVMIprogramsgoevenfurther:retailersallocateshelfspace
7

andallowmanufacturerstoplanalsoproductassortmentsandfacingsinadditiontoreplenishmentquantities.
ThisrepresentstheultimateinVMI,givingmanufacturerscontroloverallmerchandisingdecisionsinindividual
stores.
Ontheotherhand,inbetweenBMI(BuyerManagedInventory)thetraditionalwayofproductreplenishment
andVMI,thereisalsoCMI(ComanagedInventory).Thekeydifferenceisthatorderplacedbythesupplieris
stillarecommendationandisnotafirmorderuntilapprovedbythecustomer(seeFigure4).InaVMIprocess,
the order generated by the supplier on the customer's behalf is a firm order to deliver product and bill the
customer. We can also distinguish between VRI (Vendor Replenished Inventory) and VMI, where the latter
would then include also ability to decide on assortment, not just mecanically replenishing what has been
decided.

Figure4.Inventorymanagementmodelsoverview
(BMIBuyerManagedInventory,CMICoManagedInventory,VRIVendorReplenishedInventory,VMIVendorManaged
Inventory)

2. VMIsetupprojectsteps
WhileemployingVMIinatraderelationshipingeneralisaprocessandnotaproject,thefirsttimetheVMI
isimplemented,itshouldbemanagedasaprojectinordertobesuccesful.AVMIprojectcanbedividedinto
sixbasicphases(see

Figure5).
1.

EVALUATE:Businesscase

2.

PLAN:Projectdefinitionandplanning

3.

TARGET:Choosecategoriesandsuppliers

4.

TERMS:Setgoalsandterms(contract)

5.

ALIGN:AlignITandbusiness

6.

ONBOARD:pilotandonboardsuppliers

Figure5.ThesixstepsinaVMIproject

2.1. EvaluateVMIBusinessCase

Anideaforaprojectshouldbecarefullyexaminedtodeterminewhetherornotitbenefitstheorganization.
Duringthisphase,adecisionmakingteamwillidentifyiftheprojectcanrealisticallybecompleted.

InVMImodel,shorttermdemandforecastingonretailersideandflowofpurchaseordersareremovedfrom
the supply chain. Absence of these elements eliminates delays in information and product flows, and
significantlydecreasestheimpactofuncertaintyanddistortioninsupplychaindecisionmaking.

2.1.1. BenefitsofVMI
ThebenefitsofVMIaremainlyrelatedtocostreductions,serviceimprovementsandgreatertransparencyin
thesupplychain.QuantitativeperformanceimprovementsthatcustomersusingVMIhaveachievedinclude:

Increaseinavailabilityof25%,(andrelatedincreaseinsalesrevenues)
Reductionininventorylevelsof15to40%(andrelateddecreaseincapitalcosts)

Thebenefitscanbegroupedintothree:1)sharedgainsofVMI,2)buyerspecificgainsand3)vendorspecific
FredMeyer,the131unit

gains(seeFigure7).
supercenterschaininAmerica,
reduceditsinventories30%,while
salesroseandservicelevels

SHAREDGAINSFROMVMI
increasedto98%.Thiswasdueto

aVMIprogramimplementedwith

twokeyfoodvendors.
Betteravailabilityandlessoutofstock(OOS):higher
revenues
VMImakesitpossibletodeliverrightproductsattherighttime
totherightplace.Theavailabilityofstockandsalesdataat
OshawaFoods,a$6billion
shoplevelhelpssupplierstomakebetterreplenishment
Canadianfooddistributorand
decisions,avoidingOOSandincreasingOSA.Additionally,
retailer,hadtremendoussuccess
visibilityatbuyerlevelisusefulwithpromotions,asthose
withPillsbury,QuakerandH.J.
productsthathaverunoutcanbequicklyreplenished.
Heinzwithturnsimprovingfrom

3to9times,whileachieving
Lowerinventorylevels:releasedworkingcapital
customerservicelevelsof99%.
Fasterinventoryturnsmeanthatinventorylevelscanbe
This,however,cameaftersome
reduced.Asrealdemandissharedwithsupplychainpartners,
initialadjustmentsinthe
alsothereservestockcanbesmaller.Lowerinventorylevels
programbecauseofthehasty
meansavingsincostofcapital,aslesscapitalistiedupinthe
natureofinitialimplementation.
inventories.

10
Fasterinventoryturns:fresherproductsandlessmarkdowns
Asstockisreplenishedmoreoften,theproductsarelesslikely
tobecomeobsolete.Thisdecreasestheneedtosellleftover
stockwithreducedprices.

GrandUnion,aNewJerseybased
groceryretailerwithmorethan
100storesandthreeDCs,
improvedinventoryturnsbyclose
to80%andachieved99%service
levels.Thissignificantlyimproved
salesbyeliminatingoutofstock
conditionsanddramatically
reducedwarehousingcosts.

BUYERSPECIFICGAINSFROMVMI

VENDORSPECIFICGAINSFROMVMI

Reductioninorderingcosts
Sinceorderingfunctionshasbeeneliminated

fromtheprocess,thebuyersbenefitfrom
reductionofadministrativeexpenses.Asthe
numberofbackordersandreturnsreduce
significantly,administrationcostsdecrease
evenmore.
Optimizedretailspaceproductivity
Asbothgeneralinventoryandsafetystock

levelsarereducedwithVMI,thisallowsfor
Figure6.BenefitsofVMItobuyerandvendor
possibilitytoincreasetherangeofgoods
offered.

Productionalignedtocustomerdemand
Theautomatedandregulardataexchange
ensuresacontinuousdemandinformation.
Upstreamproductionalsoreceivesconsumption
figuresregularly,makingitpossibletoplanthe
nextoptimumproductiondate.Thisproducesa
furtherreductioninthesupplychaininventory
levelsandtheassociatedcostofcapital.
Optimisationoftransportationcosts
ForcentralwarehouseVMI,itispossibletoaim
forfulltruckloadsandtransportationcosts
optimization.Automaticexchangesofuptodate
stockdataandsalesfiguresresultinsensible
ordervolumes,i.e.fullpallets,whicharedelivered
dailytogetherwithotherproductsofthevendor
asfulltruckloaddeliveries.

Figure7.BenefitsofVMI:Sharedgains,vendor
specificgainsandbuyerspecificgains
AllthosenumerousbenefitsdescribedonFigure7formulatethesetofthereasonswhyVMIconceptshouldbe
implemented. As specific benefits depend on particular business case, it is crucial for all parties involved to
analyse and understand the possible benefits, and have a buyin into the idea. Only then could VMI be
implementedsuccessfully.

2.1.2. CostBenefitAnalysis:VMISavingsCalculator
In order to calculate return on investment (ROI), in addition to revenues also costs should be estimated.
Implementing VMI requires investments like executing any other project in the company. The costs of
implementingVMIvarytoalargeextentanddependondifferentcharacteristicsofthecompanysuchasthe
size of the company, the ERP systems used in the company, the role of the company in the supply chain
(vendor/buyer)andsoon.
Thecostscanbedividedintotwogroups:1.Initialinvestments,2.Operational(ongoing)costs.

1.VMIprojectinitialinvestments

2.VMIoperationalcosts

Initial costs include investments into business process The costs which continue with the use of VMI after

11

change,newsoftwaresystems,andpersonneltraining:

VMIsoftwareandhardware

Costofchangingbusinessprocesses

ITsupportinhouseandexternal

Personneltrainingcosts

Projectmanagementcosts
GS1 Switzerlands (2011) estimation of total costs for a
vendor company setting up VMI were about 75 to 130
thousand. These estimations were done for companies
settingupVMIforthefirsttime.Thecostforsettingupan
additionalVMIpartnership(withanotherretailer)shouldbe
considerablyless,amountingto20%oftheinitialcosts.
Thecostsforabuyercompanyare2/3less,consideringthat
theVMItechnologicalsolutionwillbesetupatvendor,not
buyerside.

implementationarethefollowing:
VMI process manager/team costs. The extent of
personnel used in VMI process depends on one hand
which VMI level is chosenis it pure VMI or is it co
managed inventory (in latter case, there is a VMI
manager on buyer side as well). On the other hand, the
amount of work on vendor side depends on which VMI
model is chosen, DC or DSD VMI. In DSD VMI, at least 1
FTEshouldbeplannedforthework.
VMIoperationalcosts.Operationalcostsincluderunning
costs of new equipment and new software (a VMI
solution for vendor, and potential adjustments in buyer
system),ITsupportforVMIsolution,andelectronicdata
interchange(EDI)coststoserviceprovider.
Inaddition,ifconsignmentispartofthedeal2,runningcosts
alsoincludeinventorycarryingcostsforsuppliers.

VMIsavingscalculatorforVendor
Onehandytooltoestimatethenetbenefits(allpotentialsavingsminusallpotentialcosts)fromswitchingto
VMI is to use a VMI savings calculator. This is a strategic level tool for defending the business case to your
partnersoryourmanagementboard.Forexample,asimpleExcelbasedcalculatorcreatedbyTelemacanbe
used.TheTelemaVMISavingsCalculatorincludesseparatemodelsforbuyersandvendors.
InTelemaVMISavingsCalculatorfortheVendor,allcellsinbluearecellsthatshouldbefilledwithrelevant
dataforthespecificcompany(thenumberstherearejustanexample).ForVendor,thefollowingshouldbe
enteredasinputs:

VMIshareofallbusiness,
totalsalesandsalesmargin,
accountsreceivable,
transportationcosts,and
weightedaveragecostofcapital.

For calculator to work, the user should estimate the extent of VMI benefits. For vendor, these are in three
categories:Accountsreceivable(AR)reduction,reducedtransportationcostsandincreasedsales.
Next,bothinitialinvestmentandongoingaverageannualoperationalcostsshouldbeestimated.Asexplained
inpreviouschapter,vendorbearsbiggerinitialsetupcoststhanbuyer,asthetechnologicalsolutionwillbeset
upatthesupplier.TheresultingsavingscalculationforVendorisdepictedonFigure8.

Largeretailersmayrelyontheirleveragetopressurethevendorintoconsignmentdeals.Thesecustomersownthecurrentinventoryat
theirlocations.Oncetheconsignmentagreementhasbeensettled,customersstillhaveinventoryattheirlocationsbutthecapitalofthe
inventory is disengaged. By entering into consignment agreements with supplier, customers are effectively transferring their inventory
carryingcostandcapitalopportunitycosttothat supplier.
12

Figure8.SampleVendorVMIcalculationsusingTelemaVMICalculator

VMIsavingscalculatorfortheBuyer
Justlikeforvendors,itisusefultohaveahandytooltoestimatethenetbenefits(allpotentialsavingsminusall
potentialcosts)fromswitchingtoVMIforbuyers.TheTelemaVMISavingCalculatorisisastrategicleveltool
fordefendingthebusinesscasetoyourpartnersoryourmanagementboard.
As in Vendor calculator, all cells in blue are cells that should be filled with relevant data for the specific
company(thenumberstherearejustanexample).ForBuyer,thefollowingshouldbeenteredasinputs:

VMIshareofallbusiness,
currentinventoryonhand,
annualsalesandsalesmargin,
numberofpurchaseordersandorderprocessingcostperorder
weightedaveragecostofcapital.

For calculator to work, the user should estimate the extent of VMI benefits. For buyer, these are in three
categories:inventoryreduction,reducedorderprocessingcostsandincreasedsales.
Next,bothinitialinvestmentandongoingaverageannualoperationalcostsshouldbeestimated.Asexplained
in previous chapter, buyer bears less costs than vendor in setting up the VMI system, as the technological
solutionwillbesetupatthesupplier.TheresultingsavingscalculationisdepictedonFigure9.

13

Figure9.SampleBuyerVMIcalculationsusingTelemaVMICalculator

2.1.3. Riskanalysis
WhiletherearenumerousbenefitsofVMI(seeFigure7),someconcernshavetobetakenintoaccount.Outof
tenVMIimplementations,onlythreeorfourachievegreatsuccess,threeorfourreapsomebenefitsbutnotas
much as anticipated, and two or three fail3. The confidentiality of information sharing between retailer and
supplier,theriskoflossofcontrolbytheretailer,thepotentialincreaseinvendorsadministrativecostandless
thanexpectedbenefitsforsupplierarethemajorpotentialshortfallsofVMI.
(Carlosaidhewillimprovethischapter)

3E2Openwhitepaper

14

Figure10.RiskandmitigationplanduringVMIimplemantation
Figureunderconstruction,inputwelcome.

BusinessCasechapterneedsconclusion,somethinglike:
Afterhavingthefinancialfeasibilityandoperationalfeasibilityaswellasriskanalysiscovered,theproject
managerisreadytopresentthecasetotopmanagement.

2.2. PlanVMIproject:timeandresources

Veryimportantforthesuccessofaprojectisitswellplannedcommunication.Forthat,itisadvisabletochoose
anamefortheproject,determinethetimeframe(startandenddates),writeashortbusinessoverview,clearly
definethegoalsoftheproject,dividerolesanddutiesofproject,andplanforcommunication(whoisinformed
whenaboutwhat).

In early stages, it is appropriate to advise two to three members of the management team before officially
presentingthebusinesscase.Thislobbyingworkisveryimportantforthefurtherprojectstages.Itresultsin
relevantfeedback,whichmaybehelpfulinboththedecisionmakingmeetingandsubsequentmeetingswith
thepartner.
A project plan should be put in writing, outlining the work to be performed. During planning phase, a team
should prioritize the project, calculate a budget and schedule, and determine what resources are needed.
Resources' tasks are distributed and teams are informed of responsibilities. The project plan should also
describe which questions will be answered in what stages of the project. Table 1 describes the factors
importantforsuccessfulchangeprojectexecution.
Table1.Successfactorsforchangeprojects

SUCCESSFACTORSINCHANGEPROJECTS
Strongandconsistentsupportandcommitment
fromtopmanagementisprovided

Adequatecompositionofthechangeteam(inboth
breadthandknowledge)

Strategicalignmentwithcompanystrategic
directionobjectivesfortheprojectisdefined

Availabilityofresources(establishingresourcebase
onfrontend),includingthefinances

Compellingbusinesscaseforchangewith
measurableobjectives,i.e.clearcost/benefit
analysisisavailable

Employeeinvolvement(throughcommunicating
andempowering),i.e.usersoftheVMIsolutionare
involvedintheimplementationstage
15

Establishtimelimitontheproject(decideon
timeframetoavoidoverruns)

Provenmethodologythatincludesavision
process

Effectivechangemanagement,stronganddedicatedprojectmanager,rolesandresponsibilitiesclearly
assignedtoteammembers
Source:BasedonBusinessProcessReengineering,2000

2.2.1. VMIprojectschedule
Theprojectscheduleisthetoolthatcommunicateswhatworkneedstobeperformed,whichresourcesofthe
organizationwillperformtheworkandthetimeframesinwhichthatworkneedstobeperformed.Theproject
schedule should reflect all of the work associated with delivering the project on time. Without a full and
completeschedule,theprojectmanagerwillbeunabletocommunicatethecompleteeffort,intermsofcost
andresources,necessarytodelivertheproject.
For VMI, it is estimated that it can take 68 months elapse from the initial idea to the review. The actual
planningphasecanbecompletedinjustafewweeks.
Agraphwithstepsandappropriatetimeperiodswouldbenicehere,likethis:

Figure11.VMIsetupprojectapproximatetimeline
(explainthefigure,makeitbigger)
Itisrecommendedthattheprojectstagesbecoordinatedandimplementedjointly.Priortotheactual6stage
process, the commitment of both management teams to joint clarification of any issues related to VMI
implementation is required. Without such commitment, the chances of the project being on time,
commerciallyadvantageousanddeliveringsustainablesuccessforbothpartiesaresmall.

2.2.2. VMIprojectorganisation
ImplementingVMIinvolvesmanydepartmentsacrossbothvendorsandretailersorganisations.ForVMI
project,apossibleorganisationalstructureisasdepictedonFigure12.Inthiscase,thevendorandretailer
determinetheprojectteamafterjointlydecidinginfavourofaVMIsolution.Theprojectteamincludes
employeesresponsibleforimplementation.Afterimplementation,vendorscustomerservicesdepartmentisin
chargeforthedaytodayoperation.

16

Figure12.SuggestedProjectorganisationforanVMIproject
TheVMIprojectmanagerhasoverallresponsibilityfortheproject.Hereportstotheprojectcommitteeand/
orprojectsponsor,whointurninformstheclients.Theindividualemployeesinvolvedinprojectfromvarious
departments both on the vendors and retailers side, are given their tasks and deadlines by the project
manager.Theyinturnreportbacktotheprojectmanageronthestatusoftheirwork.
Due to the fact that two parties (vendor and buyer) are involved in the project, it is recommended that a
project sponsor be elected. He reports to the management and the project committee and coordinates the
project team. Although all parties have responsibility for the success of the project, the role of the project
sponsorisofparticularimportance.Heisnotonlyatthetopoftheprojecthierarchy,butmustalsoensurethat
one of the most frequent reasons for projects failing is avoided, namely lack of support from the top
managementoftheparticipatingcompanies.MoreaboutkeysuccessfactorsinVMIprojectscanbefoundin
Chapter4.

2.2.3. Projectteamskillsandresponsibilities
ResponsibilitiesforeachactivityinaVMIproject
should be assigned to specific team members.
The RACI model brings structure and clarity to
describing the roles that projectteam members
play in a project RACI model is a matrix that
clarifies responsibilities and ensures that all
activitieswillbedone.
ToapplytheRACImodel,allactivitiesshouldbe
listed, and for each activity then specified who
isResponsible, who isAccountable, and where
appropriate, who needs to be Consul
tedorInformed (see panel on the right for
explanations).
Using a RACI model promotes common
understanding of processes related to
implementing VMI. A sample RACI chart
describingimplementingVMIisshowninTable2.

RACIchartusesthefollowingdefinitions:
Responsiblefortheactualimplementation.Theperson
who takes the initiative for implementation (by others)
or who himself implements the activity. This is also
interpretedasresponsibilityinthedisciplinarysense.
Accountable for costs with responsibility in the sense
ofapproval,grantingorsigning.Thepersonwho
is responsible in the legal or commercial sense. This is
also interpreted as responsibility from a cost centre
pointofview.
Consulted advisory role (specialist responsibility). A
person who is consulted for advice. This is also
interpretedasresponsibilityfromatechnicalstandpoint.
Informed to be informed (right to be given
information). A person who receives information about
progressand/ortheoutcomeofanactivity,orwhohas
therighttobeinformed.

As a rule, only one person (role) should be accountable for each process. However, several persons may be
responsiblefor,consultedonorinformedaboutanactivity.Itmayalsohappenthatapersonisatthesame
timeaccountableandresponsibleforanactivity.
17

Table2.RACIresponsibilitieschartforVMIproject
Project Customer
manager

Task

IT
Marketing
manager

Sales

Customer
services

Master
data

Definetargetcategoriesand
suppliers

R/A

Comparemasterdatawith
customer

R/I

Specifybusinessprocesses

R/A

Specifytechnicalprocesses

R/C

Errorhandlingingoods
delivery

R/I

SpecifyKPIsandproject
review

R/A

VisualiseITsystems
architecture

RResponsibleforexecution
AAccountableforimplementation
CConsultedforagreementandcoordination
IInformedaboutprojectprogress

ThemainskillsneededfortheVMIprojectmanagerare:

Deepprocessunderstandingregardingorderingprocess
Understandingdifferentapproachesofplanningprocess
Understandinghowpromotionsimpacttheregularbusiness
Interfacemanagementskills
Skillsdodeveloptestprocedures,
Skills to develop exception reports to monitor the day to day operation and standard reports for
internalandexternaluse
Listeningskills
Executionskills(makethingshappen)
Deliveryontime(tobearolemodelfortheteam)

In case those skills are not available, it is strongly advised to acquire external support. Many management
consultancies, EDI service operators and VMI solution providers can help with professional VMI project
managementsupport.Thiswillgreatlymitigatethegoliverisk.

2.3. SelectVMItargetcategoriesandproducts

18

2.3.1. WhichsupplierstoincludeinVMIprogram?
PastexperiencewiththeimplementationofvariousVMIprojectshighlightsthatanypreviouscollaborationon
optimization (efficient product introduction, efficient promotions and efficient placement) facilitates VMI
implementation,asthepartiesalreadyknowandtrustoneanother.
WithwhattypeofcompaniesandproductswillVMIwork?ApopularbeliefisthatVMIisvaluableonlyforhigh
volume items with relatively stable, predictable and repetitive demand to justify the additional investment
requiredforstartingVMI(Cooke,1998).WalMartandProcter&GamblehavehadaVMIprogramtogetherfor
over 25 years to manage the inventory and production of disposable diapers with great success. Inventory
turnsdoubled,WalMarts'operatingcostsfell,andP&G'smarketsharegrew.
Clark&Hammond(1997)andDeakins(2008)bothshowthatVMIismoredifficulttoimplementwhendemandis
volatileornotreasonablypredictable(fashions,seasonalfoods,etc.).Disney&Towill(2003a)studiedtheeffectof
VMIonthebullwhipeffectforbothlowandhighvolumeproductionandshowedthatVMIhaspositiveeffecton
bothlowvolumeandhighvolumeproducts.
Thereareindustrieswherethevolatilityofconsumerdemand,localconditionsormarketsizedictatethatthe
buyershouldretaincontrolofinventoryreplenishment.ThiswasthecasewithKMart,whichafterreducing
thenumberofvendorsitworkedwith(from300to50)andimplementingVMIdiscoveredthatitsownbuyers
coulddoabetterjobofforecastingconsumerdemandincertaincircumstances.Somemarketconditionsdo
notmakeVMIthebestsolutionandtailored/hybridapproachesneedtobeexplored.
Niranjanetal.(2012)havedevelopedatoolkitforpractitionersthatenablemanagerstodeterminewhethera
companyisreadyforVMI.Theylistfifteendeterminantsdividedinthreedifferentareas:1)buyerspecific,1)
productspecificand3)vendorspecificprerequisites(seeFigure13).

BUYER

VENDOR

buyer/vendor

Vendors

Figure13.The15featuresthataffectanorganizationsreadinessforVMI
Source:AdoptedfromNiranjan,WagnerandThakurWeigold,2011
For example, Niranjan et al state that a retailer for whom purchasing is the core competency would be
reluctanttoadoptVMIandmayinsistonretainingthetraditionalpurchaseorders.Thecriteriamarkedwith
stars on Figure 13 are those that can be improved/changed. For example, good information and
19

communicationsystemmaynotyetbeinplace,butcanbebuiltovertime.Willingnesstoshareinformationis
alsoamatterofdecision.
Theauthorsofthecurrentmanualbelievethatinadditiontothe6starredcriteria,thereareothersthancan
beinfluenced.Eg,ifstandardproductidentificationisnotyetinplace,thiscanbeinstituted.Onvendorside,
bothadvantagesevidenttobothvendorandbuyerandvendorsarewillingtocooperatearecriteriathat
can be influenced trough communication and enlightenment, trough sharing VMIrelated information. One
potentialtoolforthatcommunicationisthemanualathand.
FrankehasstudiedVMIadoptioninXindustriesandcarriedoutasurveyaboutbuyerchoosingistsuppliersfor
theVMIprogram.Althoughinanotherindustry,theresultsareusablealsoinFMCGsector.Whendecidingon
whichpartnerstoincludeintheVMIprogram,wesuggenttolookattheissueslistedinTable3
Table3.IssuestoconsiderwhenchoosingtradepartnersfortheVMIprogram

IfyouareaBUYER,considerthefollowingissues

IfyouareaVENDOR,considerthefollowingissues

Locationofthesupplier

Locationoftheretailer

Categoryofproductssupplied(ie,milkvsclothes)

Volumeoftrade/marginwithparticularsupplier

Volumeoftrade/marginwithparticularretailer

Pastrelationshipexperience(length,quality)

Pastrelationshipexperience(length,quality)

Pastdeliveryreliability

Shareofpromotionalsalesvsregularsales

ForVMIrollout,itmightbeusefultoreducethenumberofsupplierstogetthecriticalvolume.Thepurchasing
departmentshouldevaluateanddecidewhichvendorrelationshipshouldbestrengthenedtogetmorebenefit
outofit.

2.3.2. Min/MaxstocklevelsforVMIproducts
Forproducts included in the VMIprogram, the next step is to determineMin/Max stock levels for products.
TheMin/Maxmethodwasoneoftheearliestautomatedinventoryreplenishmentmethodsusedinenterprise
softwarededicatedtoinventorymanagement.TheMinvaluerepresentsastocklevelthattriggersareorder
andtheMaxvaluerepresentsanewtargetedstocklevelfollowingthereorder(see
Figure14).

Figure14.Min/Maxinventorysystem
TheMin/Maxmethodtracksthecurrenttotalstocklevel,whichistypicallythesumofthestockonhandplus
the stockonorder for every single SKU (product). When total stock reaches the Min value, a reorder is
20

triggered.ThereorderquantitytargetstheMaxvalueforthenewtotalstocklevel,henceinsimplestform,the
reorderquantityisthedifferencebetweenMaxandMin(i.e.MaxminusMin).
Anumber of approaches maybeused to determine the size of Min and Max inventory levels. TheMin/Max
levelsmaybesetmanuallyorautomatically(byadownloadfromanERPsystem).
Therearemanywaysofcalculatingtheminmaxlevelsforparticularproducts.Tocalculateminmaxlevels,most
modelsneed:
1. thereplenishmentleadtime,
2. servicelevelrequired,
3. orderfrequency,and
4. historicalweeklydemand.
DynamicMin/Maxquantities.
Initsoriginalform,Min/Maxorderingwasconsideredtobeafairlystaticmethodofinventorycontrolwherethe
Min/Maxvalueswererarelychanged,maybeafewtimesperyear.Marqusetal.(2010)haveproposedthatthe
definedMin/Maxquantitiesshouldbedynamicandfollowtheseasonalityandsalesoftheproducts forbetter
performance.ThisprincipleissupportedalsobyClaassen,vanWeele,&vanRaaij(2008),whostudiedfivecasesin
differentindustries,andHenningsson&Lindn(2005),whostudiedIkeasVMIapproach,concludingthatdynamic
arrangementforminimumandmaximuminventorylevelsshouldbepreferredoverstaticones.

Lesswellknownfact: the target Min/Maxvalues maybeexpressedinadditon tounitsalsoin

daysofsales(DOS). HavingMin/Max valuesindaysofsalesratherthanin units makes them
automaticallydynamic.However,notallsystemsareabletohandleMin/MaXvaluesinDOS.

ForDCVMI(VendortoBuyerDistributionCenter):Itisadvisabletouseminimumandmaximumtargetsindays
ofsales(DOS).

Itisnotsmarttosetverylowtargetsrightaway,instead,a3phaseprojectwithgraduallylowerstock
levesisrecommendedinordertonotriskproductavailability.

ForDSDVMI(VendortoBuyerindividualshops):Itisadvisabletouseminimumandmaximumtargetsinunits.

Smallershopshavelowertargetstocklevelsthanbigger(orbetterlocated)shops.Incasethedemand
ofthebettersellingshopsishigherthanonetradeunit(TU)perweek,itisrecommendedtoincrease
thefrequencyofdeliverytoensureproductavailability.

2.3.3. Determiningdeliveryunits/DCVMIfulltruckloads
Once Min/Max levels are set for products, next step is to define the ideal replenishment quantity for each
product,takingintoaccountexistingstocklevelsandavailabilityrequirements.Ideally,fullpalletsareshipped
to the customer and delivered together with other products as a full truck load. Unfortunately, this is not
alwayspossible,sotheaimmustbetooptimisetheratiooflogisticshandlingcostsandtheaverageinventory
levelintransportationunitsormoney.
Asarule,thevolume of promotions isunderestimated.Inmanybusinessrelationships,promotionsaccount
forabigshareandhavealsoadirectimpactonsalesofstandardproducts.Figure15illustrateshowsalesofthe
standardproductfallduringapromotionalcampaign.Suchmassivefluctuationsinsalesmustbeanalysedprior
to technological implementation. It is advisable to use 26 weeks of information. Based on the results, the
correct inventory Min/Max settings must then be aligned with the sales and planning department and
programmed.

21

Figure15.Impactofpromotionsonsalesofstandardproducts

Todetermineweeklyreplenishmentquantitiesandunits,ananalysisbasedonhistoricaldatashouldbecarriedout.
Weeklyconsumption(incases)iscomparedwiththestandardpalletsize.Iftheweeklyrequirementisamultiple
of the standard pallet size, the conditions for sustainable and successful VMI process optimisation for both
businesspartnersareinplace.InTable4,itemsmarkedingreenareobviouscandidatesforfullpalletdeliveries
due to the high weekly demand. Some items, which have also been defined as suitable for VMI (marked in
amber)aredeliveredinindividualcasestoensurefreshness.Itemshighlighted inredarealsopartofthedefined
VMIproductrange,butwillbereplenishedasdisplayorlayer.
Table4.Determiningweeklyreplenishmentneedsanddeliveryunits

Historicaldata,
26weeks

Masterdata

Vendor
itemno.

Itemdescription

10103

Pluto58g

10104

Proposal

Average weekly
consumptionin
cases

Casesper
pallet

Palletsper
week

Optimal
deliveryunit

72

324

4.5 Fullpallet

Plutominis1kg

125

185

1.5 Fullpallet

10120

Plutominiatures75g

125

325

2.6 Fullpallet

10121

Plutominiatures150g

125

23

0.2 Case

10125

Plutominiaturesdisp.1,500g

480

120.0 Display

32120

Longgrainrice1,800g

72

36

0.5 Case

32200

Longgrainrice900g

144

933

6.5 Fullpallet

42321

pro.activmilk

72

133

1.9 Fullpallet

Onthebasisofthisevaluation,thedecisioncanbemadewhichdeliveryunit(e.g.fullpallet,display,unitor
case per item) is triggered to ensure that the target DOS (days of sales) is not exceeded. Minimum stock or
reservestockisassumed,whichcoverstheaveragerequirementforXdays.Iftheresponsetimeisshort,i.e.
theproductsindemandareregularlysupplied;thereservestockmaycovertwotofourdays.Ifreplenishment
takeslonger,oroccasionaldeliveryinterruptionsareexpected,theminimumstockshouldcoveratleastone
week.
Thiscalculationalsofacilitatesthecalculationoftheweeklydeliveryvolume.Inaddition,anoptimisedorder/
deliveryrhythmisderived,whichmustthenbediscussedindetailwiththepartner.Theseparameters,which
havebeenoptimisedintransportterms,canbestoredintheVMIsolutionorthecompanysownERPsystem
andfixedsettlementprices(e.g.shuttletariff&expresssurcharge)definedtogetherwiththelogisticsservice
provider.Bymanagingfulltruckloads,transportcostsarecutwheretoomanypartialdeliverieswerepreviously
triggeredbytheretailer.
22

Automaticexchangesofuptodatestockdataandsalesfiguresmakeitpossibletooptimisetheorderdatein
the continuous replenishment process. This results in sensible order volumes, i.e. full pallets, which are
delivered daily together with other products of the vendor as full truck load deliveries. (However, it is
mandatory for these to be coordinated with the retailer in advance (specify in VMI contract), so that
unnecessarystockisnotincreasedontheretailerssideorthebestbeforedateproblemexacerbated.)

Type

Fulltruckload

Weekly

No.of

Maxi

Leadtime

Combin

FTLtariff

Express

No.of loads

(FTL)

require

pallets/

mum

forrepl.

ation

inEUR

sur

perweek

mentin

truck

weight

options

chargein
EUR

pallets

Road

Confectionery

52

Road

Nonperishables /

128

Rail

Nonperishables /

54

Road

Promotions

Total

Weekly

Adhoc
234

34
64
34

34

18t

12hrs

18t

12hrs

28t

24hrs

18t

48hrs

Non

Non

3plus

Nowthattheconsignmentvolumeandconsignmentfrequency(order/deliveryrhythm)havebeendefined,the
optimum weekly delivery schedulecan be prepared with the customer. A distinction may be made between
deliverybyrailorroad,dependingontheproductrange.
Table5.Sampledeliveryschedule
Type

Productrange

Confectionery,chilled

Mon
10.30

Road

Confectionery,chilled

15.30*

Road

Nonperishables

9.00

9.00

Rail

Nonperishables

11.00

Rail

Nonperishables

23.00***

Road

Promotions

Road

Promotions

*
**

Tues

Wed

10.30

16.30*

Thurs

Fri

Sat

Sun

10.30**

11.00

23.00***

X****

X****

X****

X****

9.00

Reservedeliveryslotforadditionalquantities
Reservedeliveryslotafterdiscussionwithgoodsindepartment

***

Reservedeliveryslotforrailtransport

****

Afterdiscussionwithgoodsreceiptdepartment

Explanation: an additional reserve delivery slot is defined for each day to ensure that ramp capacity is not
overextended if additional quantities are required and other suppliers do not face delays as a result. With
regardtopromotionquantities,separatedeliveryslotsshouldideallybedefined.

2.3.4. ProductMasterData
Accurate master data management is a prerequisite for
vendor managed inventory. In master data management
23

Masterdata istheconsistentand
uniformsetofidentifiersandextended
attributesthatdescribesthecore
entitiesoftheenterpriseincluding
customers,prospects,citizens,
suppliers,sites,hierarchiesandchartof
accounts.

(MDM),businessandITworktogethertoensuretheuniformity,accuracy,stewardship,semanticconsistency
andaccountabilityoftheenterprisesofficialsharedmasterdata.
____
Master data relevant to VMI includes product related master data and location related master data. It is
importantthatvendorandbuyerareabletoexchangeproductrelatedmasterdataaccuratelyandtimely.
All retailers need product master data (product attributes like codes, sizes, colors, units, prices etc) from
vendors. Most retailers have established a certain form (often in Excel) on which all required data about all
productsneedstobesent.OftentheserequirementsaremoreextensivethanvendorssERPscanprovide.
RegardingVMI,thereareafewproductmasterdataattributesthatwillbeadditionaltothoserequiredwithout
VMI,mostimportantly,theMin/Maxstocklevelsforeachproduct.
Table6.ProductMasterDatarelevantinVMIprogram,ontradeunitlevel

Field

Explanation

Samplevalue

ProductMasterDataneedstobesyncedwith
vendorandbuyeraccuratelyandtimelytoensure
thesuccessoftheVMIprogram.

GTIN

GlobalTradeItem
Number

120788734657

Description

Itemdescription

ChocolateBar

CU

ConsumerUnit

piece

TU

TradeUnit

package

LU

LogisticsUnit

pallet

CU/TU

CUsperoneTU

12

TU/LU

TUsperoneLU

108

Rep.unit

Inwhichunitswillthe
itembeordered

CU/TU/pallet

Promo

Iteminpromoornot

Y/N

Product master data is one of the complex data to manage. There are many providers offering solutions to
managemasterdataeffectively.OrganizationshavetochooserightPDMproductwhichiseasytoconfigure,is
highly customizable, extensible and at the same time upgradable. A sophisticated PDM implementation can
havedramaticeffectsonrevenueandincreasingprofit.Theleading15PDMsoftwaresolutionsarelistedhere:
http://www.cpcstrategy.com/blog/2015/02/15pimsoftwareretailers/

Table7.LocationmasterdataneededinVMIprocess

Field

Explanation/Samplevalue

1 ShiptoaddressGLN

24

2 InvoicetoaddressGLN
3 Replenishmentfrequency

Daily/weeklyorMoandThu

4 Agreeddeliverytime

10:00a.m.

2.4. Terms:SetGoalsandTerms(VMIContract)

WhenproductrangeforVMIidentified,volumesanddeliveryschedulesdetermined,theseshouldbeagreedin
writing.AVMIcontractoraVMIappendixtoexistingtradecontractshouldbeprepared,discussedandsigned.
AVMIagreementshouldincludesixmajorchapters(seeFigure16).

Figure16.MainchaptersinVMIcontract
Hereacoupleofparagraphsareneeded,referringtoappendixwherethesamplecontractis.
AcomprehensivesampleVMIcontractcanbefoundinAppendixX.

2.4.1. KPIsformeasuringthesuccessofVMIproject
For the VMI project to work, it is necessary to set common goals and use clear key performance indicators
(KPIs)fromthestartoftheproject.KPIsareasetofmeasuresfocusingonthoseaspectsofperformancethat
are the most critical for the current and future success of the project. The benefits of the VMI program are
normallyevaluatedagainstasetofperformancemeasuressuchasshownonFigure17.

25

Figure17.PerformancemeasuresofaVMIprogram
A special survey about which KPIs should be used in VMI projects was carried out in 2014 among the ECR
membercompaniesinEuropebyTallinnUniversityofTechnology.33expertsanswered,identifyingtwomajor
VMIprojectKPIgroups
1) Inventorylevel,measuredindaysofsupply(DOS)
2) Availability,measuredbyonshelfavailability(OSA)*andoutofstock(OOS).
*ForcentralwarehouseVMIprograms,thewarehouseavailability(fillrate)isoftenused.

1.VMIKPI:Inventorylevel
Inventoryefficiencyisoftenmeasuredbyinventoryturnover(ITO).ITOisaratioshowinghowmanytimesa
company'sinventoryissoldandreplacedoveraperiod.TheInventoryTurnoveriscalculatedas

InventoryturnoverITO=CostofGoodsSold

AverageInventory

The higher the inventory turnover, the fresher the products and the lower the current inventory. Fresher
products mean fewer discounts and fewer writeoffs because of obsolescence. Lower inventories mean less
capital invested into stock and therefore significant savings in cost of capital. Higher turnover and lower
inventoriesalsomeanpotentialtowidentheassortmentandearnmorerevenues.
Daysofsupply(DOS)couldbecalculatedbyinvertingtheinventoryturnoverfigureandadjustingforunitsof
measure.Forexample,aturnoverof30(thirtytimesperyear)wouldbeequivalenttoatimesupplyof1/30
yearor365/30=12daysofsupply.However,theturnoverratioisbasedonthecostofsalesforthepastperiod
and on the average inventory investment in euros. Aggregate euros and a historical view are not useful to
operations,whichneedstomatchsupplyanddemandofspecificitemsinthefuture.
Thus,itismoreusefultocalculateDaysofSupplyonitemlevelusingunits,ratherthanmoney:
26

DaysofSupplyDOS=Inventoryathandinunits

Averagesalesperday*

*Basedonhistory,inmoreadvancedcasesconsideringalsoforecasteddemand

Generally,smallerdaysofsupplyfiguresareindicativeofaleaner,moreefficientinventoryusage,butthiscan
becarriedtoofar.Fragilesystemshavecrashedbecauseofalackofsupply,sothetargetvaluesshouldbeset
carefully.

2.VMIKPI:Availability
Availabilityisthemeasureofaproductbeingavailableforsaletoashopper,intheplaceheexpectsitandat
thetimehewantstobuyit.Therearedifferentlevelsofavailability:

OnShelfAvailability(OSA).Thisisthemeasurewhichshowsthattheitemisonthestoreshelf.This
measureisusedindirecttostoreVMIprograms.

WarehouseAvailability.Theproductisavailabletoorderfromcentralwarehousetostores.Thisisthe
mostoftenusedmeasureincentralwarehouseVMIprograms.Asynonumusedinindustryisfillrate.

ItisalsowisetodistinguishbetweenProductAvailability(measuredbyproductfillratewhetheraproduct
can be supplied from (store) inventory) and Order Availability (measured by order fill ratewhether all
productsintheorder(shoppingbasket)canbesuppliedfromthe(store)inventory).
An Out of Stock (OOS) event occurs when, for some continuous
time, an item is not available for sale as intended. If the retailer
intendsanitemtobeforsale,butthereisnophysicalpresenceofa
saleableunitontheshelf,thentheitemisdeemedtobeOOS.The
OOSeventbeginswhenthefinalsaleableunitofaSKUisremoved
fromtheshelfanditendswhenthepresenceofasaleableuniton
theshelfisreplenished1.

Theglobalaverageofretailout
ofstocks(OOS)is8.3%atstore
level1,leadingtoanestimated
lossoftotalrevenueof4%.

TherearealsovariousOOSratescalculatedinindustry,referringtostatisticaldescriptionsofcollectionsofOOS
eventsexpressedasanOOSrate.Theseattributesinclude:1)numberofoccurrencesovertime,2)numberof
simultaneous occurrences, 3) duration, 4) shelf availability, 5) lost unit sales, 6) lost monetary sales, and 7)
numberofcustomersimpacted.
However,oftentheOOSisnotmeasured,asthisisconsideredexpensive.Thetraditionalmethodistoperform
amanualauditofthestoreandmanuallylookforgapsontheshelves.Asecondmethodmakesuseofpoint
ofsale(POS)dataor,morespecifically,scannerdata.Baseduponhistoricalsalesdata,analgorithmisapplied
to sales patterns to determine whether an item is on the shelf. There are many practical papers written on
bothOSAandOOSreduction,forexample,anECRWhitepaper4aswellastheP&Gfundedstudy5.

SettingcommongoalsfortheVMIprojectusingKPIs
It is beneficial to agree on common target values of KPIs to be achieved by switching to VMI. There can be
many performance indicators that could have agreed target values, but it is useful to include at least one
inventoryturnovermeasureandoneavailabilitymeasure(seedefinitionsabove).ThetargetvaluesofKPIscan
beverymotivating,especiallyiftheyareagreedinwrittenform,preferablyinVMIcontractbetweenvendor
andbuyer.

4GerhardHausruckingerApproachestomeasuringonshelfavailabilityatthepointofsaleRolandBergerStrategy

Consultants,ECREurope,2006,http://ecrall.org/files/OSAMeasurementWhitePaperfinal_E1.pdf
5ThomasW.Gruen,DanielCorsten,AComprehensiveGuideToRetailOutofStockReductionIntheFastMovingConsumer

GoodsIndustry,2007,http://www.nacds.org/pdfs/membership/out_of_stock.pdf

27

2.4.2. VMIContractbetweenvendorandretailer
VMIrelationshipisestablishedusuallybetweenpartnerswhohavebeendoingbusinessforsometimealready.
This means that there already exists a trade contract covering terms and conditions of business, possibly a
qualityagreementandothersupplementingagreements.WhenVMIisimplemented,itisnecessarytoeither
replacetheexistingcontractorproduceacomprehensiveVMIappendixtothecurrentcontract.
In the VMI agreement, common goals can be agreed, as well as responsibilities and rights clearly allocated.
BothpartiesmustbeawarethatorganisationalandITadjustmentsarerequiredinordertoimplementthenew
purchasingmethod.AsVMIagreementsareprivatecontracts,theyarenotregulatedbyanylegalcodenoris
thereanycodifiedstructuretoconformto.ThereisusefulacademicresearchaboutstandardVMIagreements,
the most notable by Zammori et al (2009)6. While their work focused mainly on suppliermanufacturer
consignmentVMI,itisstillusefulwithmodifications.
Based on research and practice, the topics to be covered in VMI contract can be divided into six major
chapters:
1.
2.
3.
4.
5.
6.

Objectiveandtermsofagreement
Servicelevelagreement(SLA),includingKPIs
Agreedassortmentandpromotions
Deliveryterms
Informationexchange
Miscellaneous

ExplanationofVMIcontractchapters
1.

Objective and terms of agreement. In first chapter, the scope of the agreement (Vendor Managed
Inventory)andthewillingnessofbothpartiestoundertakearelationshipbasedontrustisunderlined.
Theserviceperformedbythesupplierandtheinformationreleasedbythecustomertosupportitare
defined.Additionally,thestartanddurationoftheagreementisspecified.

2.

Service Level Agreement (SLA). In this chapter, goals of the VMI project are specified in terms of
target values for specific performance metrics (KPIs). KPIs shall be tied in with penalties and/or
benefitsandpartiesmustdefinethecontrollingsystem.Handlingofservicelevelproblems,especially
outofstocksituations,iscovered.

Zammori:TheSLAisacharacteristicsectionofanylogisticagreement(i.e.performancebasedagreement)
wherethecustomerandthesuppliercommitthemselvestoattainapredeterminedlevelofperformance.
Thispartdefinestheservicewhichisexpectedtobesuppliedbyboththecustomerandthesupplierand
includesalistofkeyperformanceindicators(KPIs)usedtoquantifyandtoassesstheachievedlevelof
performance.Forthisreason,KPIshavebeentiedinwithpenaltiesand/orbenefits,inordertodefine
congruentbonusmalusincentivesystem.Furthermore,achapterhasbeenincludedwhichgivesthe
possibilityofmakingperiodicinspectionstocheckthepreservationoftheoperatingconditionsand/orof
thequalitystandardsdefinedintheagreement.

3.

Agreed assortment and promotions. Third chapter covers the frequency of assortment reviews,
describeshandlingofchangesinassortmentsandspecifiespromotionshandling.

4.

Delivery terms. In fourth chapter, delivery slots are defined. Delivery information exchange,
emergencydeliveries,handlingofproblems,andlabellingstandardscovered.

5.

Informationexchange.Inthischapter,theEDIchannelsaswellasbackupstrategydescribed.AllEDI
messages are listed with their content, sender and frequency. Product master data attributes listed
andexplained.NecessaryinformationgivenaboutVMIlocations(warehouses,shops)

6Zammori,Franceso,Braglia,MarcelloandFrosolini,Marco2009.AStandardAgreementforVendorManagedInventory.

StrategicOutsourcing:AnInternationalJournal.Vol.2,no.2.pp.165186.

28

6.

Miscellaneous.Inthelastchapter,mostimportantisthelistofcontactsforimportantteammembers
on both sides. Other important legal considerations are covered here: confidentiality, terms of
terminationofcontractandsolvingofdisputes.

Itisimportanttostudyexistingcontractsindetailpriortosigningtheagreementandforthepartiestodiscuss
allaspects.Consensusisrequiredonthemostimportantpointstoavoidenteringintoadditionalobligationsvia
the VMI agreement. If the wording of the same contractual points differs in the various agreements, it is
advisabletoadjustthesepointsinthenewagreementtobesigned,orexpresslystipulatethisinanadditional
agreementtotheVMIcontract.Thisprocedureprovidesclarityintermsofthelegalbasisandhelpstofocuson
theamountofdebtanddamagesintheeventofadispute.Inparticular,howtohandleexceptionsandsolve
problemsinthenewcollaborationshouldbecovered.
AcomprehensivesampleVMIcontractcanbefoundinAppendixX.

Pointstoconsider(notinsamplecontractcurrently)

VMItrainings
pointoftransferofownership
reliabilityandsharedrisk
transferofservicestoathirdpartyprovider(e.g.,transportationbyalogisticsserviceprovider)
Numberofweeksofforecastdemandusedforplanningreplenishmentlevels
Financialaspectsofrelationship(setupcostssharing,penalties/bonusesifany)

2.5. AlignITandbusiness

2.5.1. Internalandexternalbusinessprocesschanges
WhenproductrangeforVMIidentified,volumesanddeliveryschedulesdetermined,internalprocessshould
bereviewedandmodifiedtosupportthenewreplenishmentstrategy.Itisadvisableto:
Share experiences with other vendors and business partners who have implemented the vendor
managedinventorymodel.
Describetargetprocessesanddevelopaprocessstructurewhichmeetsfuturerequirements.
IdentifytherequiredprocesschangesandITinvestmentsinhardware/software.

AretailerimplementingVMIwillseethatmanyprocesseshavetobechanged.ThereisaresearchbyReitner
etal.(2012)describingthosechangesindetail.Hereweshowasimplifiedversionoftheirwork.
29

Table8.VMIimpactonretailerprocurementprocesses.

(needstobereviewed.Perhapsasimilartableforsuppliersadded)

2.5.2. VMIprocessandEDIdocuments
AprerequisitefortheefficientapplicationofECRprocessmodelsistheuseof
the globally defined GS1 standards, which offer a basis for the electronic
interchangeofdatabetweensupplychainpartners.

Also, Electronic Data Interchange (EDI) is a prerequisite for succesful VMI

projects.Fortradedocuments,
there are globally many
ElectronicDataInterchange(EDI)
standards.
ECR
Europe
isthecomputertocomputer
suggests
to
adopt
GS1
exchangeoftradedocumentsina
EANCOM
standards
for
trade
standardelectronicformat
documents. However, even if
betweenERPsystemsoftrade
your trade partner uses a
partners.
different standard, it should
not be an obstacle. Most
companies are using EDI operators for connectivity, and conversion of
documentformatsisusuallypartofEDIoperatorsserviceoffering.

GS1standardscreatea
commonfoundationfor
businessbyuniquely
identifying,accurately
capturingandautomatically
sharingvitalinformation
aboutproducts,locations,
assetsandmore.GS1
identificationstandards
include:
tradeitem(GTIN)
logisticsunit(SSCC)
physicallocation(GLN)
document(GTDI)
asset(GIAI)

Table9liststhevariousmessagesusedinVMI,specifieswhethertheyareoptionalormandatoryandalsothe
frequency of transfer. The frequency of EDI document exchange differs for VMI DC (Vendor to Distribution
Center) and VMI DSD (Vendor Direct Store Delivery). All messages have been explained in more detail in
Appendix3.DescriptionofEDImessagesusedinVMI.
Table9.EDImessagesusedinVMIandtheirfrequency
Message

Description

DCDelivery

DSDDelivery

INVRPT

InventoryReport

daily

atleastmonthly*

SLSRPT

Salesreport

weeklyormonthly

daily

ORDER

Order

optional**

optional

DESADV

Despatchadvice

withSSCCreference

whendeliveryoccurs(daily,
weeklyetc.)

RECADV

Receiptadvice

recommended

recommended

INVOIC

Invoice

withORDERreference

withORDERorRECADV
reference,whenagreed

30

*andalwayswhenstockhasbeentaken
**sometimesmandatory,asretailersITsystemrequiresopeninganorderlineinitssystem

Companies using SAP often exploit message type PROACT (Product Activity). This message combines INVRPT
andSLSRPTmessagesandisthereforewellsuitedforVMIneeds.ThefrequencyofexchangeinFMCGshould
beoneday.
NotalloflistedmessagetypesarerequiredforsuccessfulVMI.FortheDCVMIprocess,thedailyinventory
report (or product activity report) is mandatory. It must indicate additions to stock, usage, goods in transit,
current stock level (date and time) and retailer orders outstanding. Other message types facilitate the
automatedreplenishmentprocess.

EDImessagesandVMIprocess
TheprocessofVMIiscomparedonFigure18tothoseoftraditional(BuyerManagedinventory,BMI)andto
ComanagedInventory(CMI).DependingonmodelchosenVMIorCMI,theprocessandEDIdocumentsused
differssomewhat.InbothVMIandCMIcases,thebuyerforwardssalesandinventorydatatoVendor,whowill
analysethedataandmakeadecisionforreplenishment.

Figure18.ProcessofreplenishmentincaseofBMI,VMIandCMI
1.

Buyer Managed Inventory (BMI).Intraditionalproductreplenishmentprocess,thebuyercalculates

andsendsorder(ORDER)tovendor.Vendorpreparestheorderandshipsit.Withthegoods,despatch
advice (DECADV) document is sent. The buyer accepts the goods with a receipt advice (RECADV)
document.Inidealcase,theinvoiceisbasedonreceivedquantitiessothattheprocessingofinvoiceis
reallyfast.

2.

Vendor Managed Inventory (VMI). This revolutionary concept turns the ordering process upside
down. The buyer does not need to order anymore, the right and responsibility is shifted to vendor.
Buyer sends regularly sales and inventory data (SLSRPT and INVRPT). Sometimes those two are
31

combined into product activity report (PROACT), especially widespread with SAP users. Vendor
calculates the order based on sales and inventory data, and agreed Min/Max levels, prepares the
orderandshipsit.TherestoftheprocessissimilartoBMI,ie,inidealcase,therearebothDESADV
and RECADV documents in use, enabling invoices to reflect actually accepted quantities to make
invoiceprocessingefficient.
3.

Comanaged Inventory (CMI). ComanagedinventoryisinbetweenBMIandVMI. Itisoftenusedin

caseswherebuyerisnotreadytogiveoverthecontrolofreplenishmenttovendor.Insteadoffully
decidingreplenishment,vendorscreateorderproposals(ORDERPROPOSAL)anddonotstartpicking
theorderswithoutwaitingfortheconfirmationfromthebuyer(informofVMIORDER).Therestof
theprocess,onceagain,isthesameasinBMIandVMI.

In some countries (eg, Switzerland) there is a practice where products in regular assortment are covered by
VMIprocess(asdescribedonFigure18)andpromotionalproductsbyCMIprocess(onthesamefigure).For
promotionalproducts,thevendorsendsanorderproposal.Basedonthatproposal,thebuyersendstheVMI
orderwiththeexactquantitiesandrespecteddeliverydays.Basedonthisorder,productionisscheduledand
latertheshipmentswillbecombinedwithregularproductsshipments.

AgreeonEDIcommunication
The foundation of a successful VMI program is automated connectivity with your trading partners. The
technologicalinterfacemustbediscussedwithyourtradepartnersandagreed.InVMIcontract(seemorein
chapter2.5),EDIdocuments(andtheirformat)used,transferchannelsandprotocolsmustbespecified(unless
the latter twoare already specified ingeneral trade agreement with the partner). Incase anEDI operator is
used,thisshouldalsobeagreedinthecontract.Theconnectivityiscriticalforenablingpartnercollaboration
andforprovidingthevisibilityneededtomonitorVMIprogramoperationsandresults.

Documentnumberingagreements
Using VMI, orders will no longer originate in buyers system but in suppliers system. This might create a
challenge for the buyer, because corresponding numbers must be set up in its own system for the order
(ORDERS).Itisrecommendedthatspecificallydefinednumberseriesareusedforthispurpose.
Wherethisisnotpossible,theretailermustgeneratehisownordernumbersonthebasisofareferencetable
andentertheseseparatelyinthereferencetable.RetailerswhoimplementaVMIrelationshipforthefirsttime
arestronglyadvisedtoallocatesufficientresourcestosolvingthisparticularissue.
Toensureasmoothprocess,itisimportantthattheorderisenteredintheretailerswarehousemanagement
system as early as possible. This guarantees that all parties involved in the process are aware of the next
delivery,especiallyinthecaseofoutofstocksituations.

2.5.3. VMItechnologicalsolution
InordertosetupandmaintainaneffectiveVMIprogram,companiesshouldinvestinasupplychainsolution
that offers visibility and control across all supply chain links. A good VMI solution should have the following
features(seeFigure19):

32

Figure19.FunctionalityofVMItechnologicalsolution
1.

2.
3.
4.
5.

Provide inventory visibility. Enable retailers to share both sales and demand data (forecasts) with
suppliers. Provide near realtime inventory visibility across warehouses, shops, hubs, suppliers, and in
transitinventories.
Enable automatic replenishment. Calculate stock balances and create automatic replenishment orders,
takingintoaccounttheagreedMin/Maxlevelsanddeliveryfrequencies.
Provideaudittrails.Provideaudittrailsforvisibilityintotransactionhistoryforliabilitymanagementand
disputeresolution.
Offer connectivity (EDI).Offerconnectivityoptionsthatallowpartnerstocommunicatewithmajorityof
theirpartnersfromsophisticatedmultinationalcompaniestosmallenterprises.
Monitor and report. Provide exceptionbased configurable alerts, so that all parties are notified of
potential inventory problems. Offer monitoring logs and analytical reports that give an overview of the
inventorymanagementprocess.

When choosing a VMI technological solution, there are two options: 1) Integrated VMI/ERP Solution or 2)
StandaloneVMISolution.

INTEGRATEDVMISOLUTION

POSITIVEASPECTS

Changestomasterdataareimmediately
availableforVMIfunctions.
Shorttermsalesfluctuationsare
immediatelyevidentfordemandplanning.

Noseparatesystem;keyusersandother

usersusethesamesystemforwarehouse
managementandorderprocessing.

NEGATIVEASPECTS
Initiallysettingupanewprocessisvery
timeconsuming.
Alongprojectleadtimeisrequiredfor
discussinganymissingandadditional
functionswithcentralITteamsinadvance
andinstallingthem.
Higherinitialinvestmentrequired.

Figure20.PositiveandnegativeaspectsofchoosingandintegratedVMIsolution
The integrated VMI/ERP solution has an automated replenishment functionality module that can handle
multipleinventorylocations.OrderprocessinginwarehousemanagementispartoftheERPsystemanddoes
notrequireadditionalinterfaces.TheprosandconsoftheintegratedsolutionarelistedonFigure20.
ThestandaloneVMIsolutionisrecommendedwhentheERPsolutionhasnoautomatedreplenishment
functionsorcannothandlemultiplestocklocations.Therequiredfunctionalityinthatcaseisdeliveredina
standalonesolution.OrderprocessingisviainterfacestotheERPsystemandindependentofwarehouse
management.Theprosandconsoftheintegratedsolutionarelistedon
33

Figure21.

STANDALONEVMISOLUTION
POSITIVEASPECTS

NEGATIVEASPECTS

Simple,triedandtestedVMItoolscanbe
used(providersarelistedinAppendixII).
Centralisedsupportbythetoolprovider
Favourablelicenceagreement
Toolwillbefurtherdevelopedbythe
provider.Releasecapabilityisguaranteed.

Changestomasterdatamustbemade
manually/orweeklyuploaded
Shorttermchangesinsalesarenot
automaticallyreflectedinthegeneral
demandplanning.Hence,thereisneedto
exchangedemandfluctuationperiodically
withthefactoryplannerorwiththerelevant
KeyAccountManager.

Figure21.PositiveandnegativeaspectsofchoosingastandaloneVMIsolution

The standalone option can be a pragmatic initial approach, followed by a subsequent switch to integrated
solution.Moreissuestoconsider:

Frequencyofassortmentchanges.Ifproductrangesaresubjecttoseasonalchanges(e.g.clothing)or
productsarequicklyreplacedbynewproducts(e.g.computerindustry),anintegratedversionismore
advantageous.

S&OPstructure/integrateddemandplanning.Iftheorganisationisgearedtotightstockmanagement,
itismandatoryfortheVMIsolutiontobedirectlylinkedtothepurchasingorproductionsystem,as
thiswillfacilitateaswiftresponsetoincreaseddemandorsluggishsales.

E2Open: Standalone solution providers typically have extensive experience enabling B2B connectivity with
suppliers,andareabletoprovidetherelevanttrainingandtechnologiesneededtogetthemupandrunning
quickly. As a result, the overall solution is less expensiveto implementand maintainfor both companiesand
their partners. Finally, ondemand solutions allow your organization to shift focus to intercompany
collaboration(acornerstoneofeffectiveVMI)andawayfromprocuring,installing,andmaintaininghardware
andsoftwaresystemsinternally.

TherearemanyVMItoolsproviderstochoosefrom,seeAppendix

2.5.4. SetupandtesttheVMIsolution
The VMI solution should be set up by the VMI project team: representatives from sales and logistics and
togetherwiththelaterkeyusers.Actualimplementation(technologicalrealisation)canbecompletedinabout
onemonth.
PlantheVMIsolutionsetupintwophases:
1.

Test phase provides the opportunity for project members to learn how to handle the new system
parametersforindividualitems.

2.

Afterthislearningphase,allitemscanthenbeenteredonthesystemfortheliveenvironment.

Developdatahistory

Uploadatleast12weeksofdatatothemanagementtool.
ManuallysupplementmissingweeksandOOSsituationsinthemanagementtool.
Highlightpromotionalproductsseparately.

34

MapEDImessages,setupEDIconnection
First,makesureyouhaveagreedbothonproductmasterdata
(Min/Max levels, ordering and delivery units) and its
communication(channels,frequency)withyourpartner.
Next, the individual EDI message types must be mapped and
tested. Many retailers have described their VMI process in
detail(forexample,seefigurex),thisshouldbeadaptedtothe
companyspecificrequirements.

Thespecificationoftheinformation
exchange:
1. whichEDIdocuments,
2. whichformats,
3. whichchannel,
4. frequency
shouldbeagreedbetweenpartiesin
theirVMIcontract(seechapterY).

Backup:Defineanddescribethebackupprocesses.
Finally,thebackupprocessisdocumentedasaprecautionincasetheEDIcommunicationbetweenvendorand
retailer should fail for several days. In this case, the minimum precautionary measure is for stock from the
retailerswarehousetobetransferredtothevendor,forexampleinanExcelfilesentbyemail.Thismakesit
possibleforthevendortocorrectstocklevelsmanually,generatetherelevantorderproposalsandtriggerthe
dailyreplenishmentprocessestopreventanOOSfromoccurringintheretailerswarehouse.

Testing
The VMI system needs to be tested prior to reallife deploy. Sometimes test environments for VMI are
availableinERPsystems(e.g.,SAP).Itisrecommendedthatthelast12weeksofhistorybebuiltuponthebasis
oftheinventoryreport.Thismeansthatvariousaspectsofthenewprocessesaretestedandatthesametime,
anyerrors(e.g.inEDImapping,masterdataortransmissionofincorrectstocklevels)areeliminatedbetween
theparties.Figure22showsasampletestplanforVMIsetup.

Figure22.SampletestplanforVMIsetup
On Figure 22, first test activities, then system availability and tester availability is described. Test activities
includepreparation(determinetestcase,maketestdataavailableandpreparetestscript)andactualtesting.
Carryingoutthetestincludesalsoevalutaionandcorrectionoferrors.Theteststepsare:
Testinterface(transferinventoryreport,salesreport,invoices)
Testhistory

Isthehistorybuiltupcorrectlybasedontheinventoryreport?
35

Arestockoutsprocessedaccordingtothesystemsettings

Whathappenswhenquantitiesoninventoryreportarenotreportedinwholenumber?

(onesuggestionistoroundthosedowntonearestinteger)
Testordering/invoicing

Aretheorderproposalscalculatedsensibly?

Doestheorderproposalcomplywiththesystemsettingsdefined(FTLoronlyfullpallets)?

Areonlyitemsactuallydeliveredinvoiced?
System and personnel resources availability is shown on the same picture for better overview. Planned
acceptancedatesarecoloredingreenandmarkedwithOK.

2.6. Rollout:PilotandOnboardPartners

2.6.1. PilotyourVMIprogram
ChoosingthecorrectVMIpilotpartnerisofbigimportanceforthesuccessoftheproject.Incaseitgoeswell,
you can use it as a success story to convince your other trade partners to switch to VMI as well. The best
salesargumentisawellworkingpartnership.
Before choosing your pilot VMI partner, you have already sorted all your suppliers into VMIsuitable and
nonVMI suitable suppliers. The main criteria are listed in chapter 2.3.1. Criteria include both the product
range a specific supplier is providing as well as on specifics of the supplier as a company. Additionally, the
relationshipbetweenthecompaniesisveryimportant.Notonlythevolumeoftrade,butalsothequalityof
therelationship.OneoftheprerequisitesforsuccessfulVMIprojectsistrust.
Besides suitable product range and existing trustful relationship, it is also important to consider technical
questions.Doesyourbusinesspartnerhavetherightskillsandtechnicalbasetoimplementneededchangesto
processes?
Implementation of VMI assumes that both partners have the basic skills relating to and Master Data
Management(readmoreinchapter2.3.4)andElectronicDataInterchange(readmorein2.5.2).Incasethose
skillsaremissing,itisimportantthatthepartnerswillemploythemassoonaspossible.
Coupleofparagraphsmoreneededhere

36

2.6.2. Trainandgolive
InvolveKeyUsersandTrain
Afterthetestshavesuccessfullybeencompleted,thekeyusershouldbeinchargeoffurtherimplementation.
Thekeyuserwillthenmakeeveryefforttoensurethatallerrorsareeliminatedbeforegoingliveandthatthe
processes work. It is recommended that the key user and the other users write the user documentation
themselvesandareactivelyinvolvedinthetechnicalacceptanceofthesystem.
Thisistheonlywaytoensurethattheyacceptthenewmanagementmethodandareproudtotakeonthis
new responsibility. Aftercompletion of this phase,thekey user is theperson who knows all system settings
and understands what information is reflected by the relevant mapping. It is high time to celebrate the
achievementstogetherwiththepartner!
Involvementofpeopleandusertraining.ImplementingVMIisacompanywideefforttoredesignandintensify
business processes with supporting technology. Therefore, everyone should be involved and driven by the
same objectives to make this big change in the company (and in the supply chain) successfully work. By
involving key people in the VMI implementation process, employees are given the opportunity to make a
significant contribution, and to see the value of VMI as the supply chain becomes transparent. More
importantly,employeesaremorelikelytounderstandtheirrolesanddevelophighsenseoftaskidentification
(Kuk,2004).
Due to changes in processes, employees need to be trained to be able to act on very different level and in
different context. Purchase people no more need to make orders; instead, they start to interact with their
suppliers on a more meaningful level, and plan the inventory andpromotions that really drive the sales and
business. On supplier side, instead of simple order handling, people now need to obtain the skills of data
analysistobeabletomakerightdecisionsforreplenishment.

Goinglive
The date on which the system goes live must be coordinated with sales and marketing at an early stage to
ensure that no aboveaverage level of activities is expected or product rangechanges are scheduled on that
date. If a consignment warehouse is installed at the same time as the VMI is implemented, the accounting
departmentmustalsobeinvolved.Thetakingoverofstockimpactsliquidityandmustthereforebeincludedin
thefinancialplanningasanonrecurringfactor.

In golive phase, good project management is necessary for the switch to work without major delivery
disruption.Adailybriefconferencecallwillensurethatsufficientfocusisplacedontheimplementationandall
participants(andpartiesaffected)areinformedaboutprojectprogress.Thefollowingpreparationsbeforethe
goinglivedateshouldbedone:

Oldstockisliquidatedandthereisaformalprotocolregardingthestockwhichwillbemanagedbythe
vendorfromthespecifieddateonwards.

Allpartieshavebeenadvisedofthedateoftheswitch,includingstaffintheretailersgoodsreceipt
department.

ITsupportavailabilitymustbeensured,sothatorderscanbetracedsmoothlyintheindividualsub
systemsatthestartandtroubleshootingsupportisguaranteedifrequired.

On the day of the switch, the first order should be followed in real time. This makes it possible to see the
volumeloadedonthefirsttruck,anditistheneasytoassesswhichofthesystemparametersneedtobereset.
InmanyVMIcases,increasingthesafetystockisadvisableforthetransitionperiod.Theactualoptimisationof
stocklevelstakesplaceatalaterdatewhenthedailyreplenishmentprocessesarestableandrunerrorfree.
Forbothsalesandpurchasing,itisimportantthatthejointlydefinedgoalsavailabilityanddaysofsalesDOS)
are guaranteed in the long term. It is therefore advisable to focus on onshelf availability at first and then
graduallyreducestockoverseveralweeksuntilthetargetDOSlevelisachieved.Therisksassociatedwiththis
procedureareminor,anditshowsthebuyerthatresponsibilityforinventoryistakenseriously.
37

Ifeverythinggoeswell,thefullyautomatedinventorymanagementsystemsarerunningsmoothlywithin68
weeks,anyteethingproblemshavebeenresolvedandthekeyuserandadditionalusersarefamiliarwiththe
dailyVMItasks.

2.6.3. Onboardadditionaltradepartners
Once a VMI strategy is chosen, we recommend engaging senior management support and making a formal
managerialannouncementassoonaspractical.Inmanycases,progressinapilotprojectiscriticaltosecuring
thissupport.ForyourVMIprogramtobesuccessfulandmaintainseniormanagementsupport,itneedstobe
alignedwithyourcorporategoals,skillsandcapabilities(youneedtheKPIsandtargets).Themessageisthis:it
mightbealrightforapilottoproducealmostanymeasurablebenefit,butaprogramneedstoproducebenefits
that are core to the corporate mission. If the goals of the VMI program are increasing sales and customer
satisfaction, your marketing and merchandising organizations will support it. In fact, our experience shows,
these constituencies are likely to ask for the program rollout to be broadened and accelerated as much as
possible.
ThemorepartnersyouhavetodoVMIwith,thebiggerthegains
Sellandmarket(usingsuccessstories)
HaveagoodVMIcontractcoveringeverythingimportant
Trainyouremployeesandtrainyourpartnersemployees
Measuresuccessagainstgoals
Communicatebothinternallyandexternally
Coupleofmoreparagraphsaboutexpandingtheprogram.ReferbacktoVMIsavingsCalculatorthebiggerthe
shareofyourbusinesswithVMI,themorebenefitsyouget.

3. VMIperformanceandcontrol
OncethehardworkofsettinguptheVMIprojectfirsttimeincompanyshistoryisdone,itistimeforreview
andadjustments.EveryprogramcouldbeviewedinPIM(Planning,Implementing,andMonitoring)cycle(see
Figure23).

Figure23.Planning,Implementing,Monitoring(PIM)cycle

3.1. ReviewandAdjust
Approximately 20 weeks after going live, it is advisable to
inviteallpartiestoaprojectreviewmeeting.Thechecklistin
Table10indicatesthetopicswhichshouldbediscussedinthis
meeting. Table 10 describes which documents are useful for
specific review activities and which adjustments will
immediatelyimproveKPIs.
38

ThemotivationbehindaVMIsystemis
thatboththeretailerandsupplierwork
togethertomaximizethe
competitivenessofthesupplychain.

Usersoftenalreadyhaveconcretesuggestionsforimprovements,whichcanjointlybereviewed.

Table10.ProjectreviewchecklistforVMIwarehousedelivery

Review activities

Yes / Basedocument
no

KPIs

Deliveryreliabilityof98.8%achieved No Weeklyavailability Increaseminimum

report
stockofitemX

DOSmax7daysachieved

No Weeklystockreport Decreasetargetstock Keyuser

levelforAitemsby1
day

Truckloadofover19tachieved*

No Transportstatement Increasetruckloadfor Keyuser

eachorder

Numberoffullpalletsdelivered
exceeds90%*

No Productionorder
statement

CommunicationIncorrectinventoryreports(INVRPT No EDIerrorreport

Actionneeded

Incorrectorders(ORDERS)<1%

No EDIerrorreport

GoodsreceivedlatebythecustomerYes Customers
duetomissingdespatchadvice
Questionsand
(DESADV)
Answersreport

User

SetindividualBitemstoUser
statusscopeofdelivery

Checkmasterdata

Retailer,
customer

Checkmasterdata

Vendor

IncreaseEDI
frequency

Keyuser

)<1%

Responsible

Otheraspects Emergencydeliveries>2perweek Yes Transportstatement Reviewstocklevelsand

increaseby1dayif
necessary

Customerenquiries>4perweek

Yes Customersupport
report

Discussenquiries/

incidentswithcustomer
supportstaff

Werethereanyproblemswith
promotionalorders?

Yes Complaints

Analyseplanning
process

Aretherespecificproductswhere
thestocklevelistoohighdueto
inaccuratehistoricaldata?

Yes Inventoryreport

Reviewhistoricaldata
andcorrectifnecessary

Havethebackupprocessesbeen
definedanddescribed?

No Backupdescription Arrange

Keyuser

Agreement

Isthecontractsigned?

No Agreement

Project
manager

Arrange

*thosemeasures/goalsarerelevantincaseofcentralwarehouseVMIprogram
Theprojectreviewmeetingistheidealplatformforillustratingthebenefitsofcontrol.Visualisationaidsare
recommendedtoprovideabetteroverview.

3.2. MonitorongoingVMIprograms
KPIs (Key Performance Indicators) are measures used to regulate and control business processes. In the
planning and negotiation phase they are defined together with the VMI partner (see chapter 2.4.1). It is
advisabletochangeandadoptcommonlyagreedKPIsovertime,accordingtosupplychainmaturity.
Iftheagreedtargetsarenotachievedinareportingperiod,thereasonsshouldbeinvestigatedtogether.For
thispurpose,monitoringattheretailerisrequired(seeTable11).Inadditiontoknowncauses,reasonsfora
limitedabilitytodelivermayincludepromotionalsalesmeasureswhichwerenotcommunicatedtothevendor
inadvanceorerrorsinthemasterdata.Together,lessonscanbelearnedfromanincidentandmeasurescan
bedefinedtooptimisethebusinessrelationship.
39

Table11isanexampleofregularVMIassortmentmonitoringatretailers:deliveredquantitiesandoutofstock
(OOS)situation.TheOOSisshownin%ofthetotalamountperitem.Thisreportenablesthesuppliertocarry
outadetailedOOSanalysis.ThetableissupplementedwithinformationaboutthecurrentstocklevelinDOS.
Accordingly, the current stock level amounts to 4.8 days within the agreed minimum and maximum stock
levels.
Table11.MonitoringVMIprojectperformanceatretailerside

3.3. ITsolutionsforKPImonitoring
EffectiveperformancemeasurementandanalyticsareessentialtoboththecurrentsuccessofaVMIprogram
andtoacontinuousimprovementprocess.Performancemanagementandanalyticseffortsrequireagreement
among all participants on relevant measures, as well as systems capable of capturing and presenting the
necessarydata.
ManysoftwaresofferpowerfulfeaturesforconfiguringandmonitoringtheKPIsofVMIprogramperformance,
suchasforecastaccuracy,servicelevel,inventoryturns,stockouts,anddaysofsupply.
Keyreports

Executionversusplanreports,whichtrackhowwellactualpullscomparewithforecasts
Trend reports, which track inventory trends and calculate how closely they stay within defined min
maxlevels
Waterfallreports,whichshowaclearrecordofforecasttransactionsandinventorypositions,aswell
asidentifyliabilitywithalertsforimpendingfreshness
Performancemetrics,whichtrackkeymetricsnecessaryforeffectiveinventorymanagement,including
inventoryturns,aging,andvaluation

Personalized dashboards provide an ataglance summary report and exception alerts, while detailed
worksheets offer full query and reporting capabilities. VMI Dashboard offers a singlescreen interface for
efficientlydrivingbusiness,sousersdontneedtocombthroughmultiplereports.Thisdashboardpresentsup
todate KPIs, and offers users an interface to manage alerts and workflow tasks and to access key reports.
Alertscanbeautomaticallygeneratedwhen,forexample,aKPIfallsoutsideauserdefinedperformancerange.
Dashboardcontentcanbetailoredtodifferentrolesandindividualpreferences.KPIscanbeviewedatanylevel
ofgranularity,suchasforaDC,anentireaccount,anSKU,oranentireproductline.Figure24showsasample
VMIDashboardgeneratedbyDemantraVMISoftware.

40

Figure24.DemantraVMIDashboard

Many VMI solutions offer also flexible and powerful query and reporting capabilities. During the
implementationprocess,agroupofstandardizedreports,orworksheets,canbedefinedfordifferentrolesand
usersintheVMIprocess.Afterimplementation,userscaneasilycreatenewworksheetsinamatterofminutes
and save them for future use. The solutions multidimensional capabilities support a flexible data hierarchy.
Thisallowsdifferentuserstosliceanddiceinformationatanylevelofaggregationandtotailorworksheetsto
individual user roles and needs. Colorcoded visual alerts inform the user of exception conditions, based on
userdefinedbusinessrules.Forexample,iftheserviceleveldropsbelow70percent,thisdisplaysthealertsin
red,asillustratedinFigure25.

41

Figure25.KPImonitoringandcolorcodedalerts(DemantraVMI)
Somekindoftransitionalparagraphneeded

4. CriticalSuccessFactorsforVMIprojects
In spring 2014, a panEuropean survey was conducted among ECR member companies in Europe about the
criticalsuccessfactorsforVMIprojects.50eligibleresponsestothesurveyfrom11countrieswerereceived.All
respondentswerecompanyrepresentativeswithpreviousexperienceinVMIprojects.
Fromextensiveliteratureresearch,30relevantfactorsimportantinVMIprojectswereidentified.Thefactors
were divided into: 1) Business Relationship Factors, 2) Company internal factors and 3) Technical success
factors.Representativesfromcompanieswereaskedtorateeachfactoronascalefrom1notimportantto5
veryimportant.Inthemanual,ashortoverviewofthesurveyresultispresented7.

4.1. BusinessRelationshipfactors
There were nine business relationship factors studied. The results (see Figure 26) point out that while it is
importanttorationallyconducttheVMIproject(haveagoodteam,agreeoncommonKPIs,haveagoodand
thoroughcontract,etc.),somesofteraspectsplayanevenbiggerroleinthesuccessoftheproject.Namely,
trust,relationshipqualityandcommitmentscoredthehighestofallfactorsinthisgroup.

Figure26.Theimportanceofbusinessrelationshipfactors(n=50,1notimportant,5veryimportant
Trust. One of the most critical and important aspects in starting VMI that many VMI studies and articles
unanimouslyagreeon,istrustbetweenthepartners.AccordingtoReitneretal.(2012)research,expertsand
companies see trust between the partners as a prerequisite for a successful collaboration as it ensures that
eachpartywillfulfiltherequirementsnecessarytomaketherelationshipwork(Pohlen&Goldsby,2003).Lack
oftrustbetweentradingpartnerswilldoomtheVMIinitiative(Niranjan,etal,2011).Kaipiaetal.(2002)add
thattrustcanbebuiltwhencompaniesareabletodemonstratethebenefitsofVMItotheirtradingpartners.
Relationshipqualityandcommitment.Barratt(2004)stressestheimportanceoftherelationshipqualityinhis
study, naming the qualities such as mutual interdependency, openness, trust, honesty, chemistry between
both partners, the frequency of interaction, and commitment. Commitment was described by willingness of
bothpartnerstoinvestinalongtermrelationship,whichalsoincludesthewillingnesstodevelopthebusiness
mutuallyandfirmlytowardsuccess.Chinetal.(2004)claimthatcommitmentisthebasisforthepartnersto

7Thebasisofthesurvey,thequestionnaire,andtheresultsareexplainedatlengthinSvenUustalusMasterThesis

(supervisedbyHeleHammer,PhD)atTallinnUniversityofTechnology,wherehedefendedhisworkandobtainedtheMaster
degreeinSummer2014.Theentirethesiscanbeobtainedbyrequestingitathele.hammer@ttu.ee.

42

work together in solving problems and resolving conflicts as both recognise that they have an important
businessinterestinvolved.Notonlymanagementcommitmentisimportant,butalsocommitmentatmultiple
levelsoftheorganisationsinvolved.

4.2. Companyinternalfactors
Thesecondgroup,companyinternalfactorsincorporatetenintracompanyfactorsthataffectthesuccessof
VMIimplementation.Figure27depictstheimportanceofthosefactors.Whilestrongprojectmanagergetting
topscoresisexpected,thensomewhatsurprisingisthehighrankinggivenbypractitionerstoimportanceof
usertraining.Nexttwofactors,alignmentofinternalprocessesandtopmanagementsupportarewellknown
areastoconsiderinVMIimplementation.

Figure27.Theimportanceofcompanyinternalfactors(n=50),1notimportant,5veryimportant
Duetochangesinprocesses,alsoemployeesneedtobetrainedtobeabletoactonverydifferentlevelandin
differentcontext.Purchasepeoplenomoreneedtoconductforecastsandmakeorders;instead,theystartto
interact with their suppliers on a more meaningful level, and plan the inventory and promotions that really
drivethesalesandbusiness.Onsupplierside,insteadofsimplyorderhandling,peoplenowneedtoobtainthe
skillsofdataanalysistobeabletomakerightdecisionsforreplenishment.

4.3. TechnicalandVMIspecificfactors.
ThethirdgroupofsuccessfactorswasdeterminedastechnicalandVMIspecificfactors,includinganytechnical
matters of the implementation project. Figure 28 shows the ratings given by practitioners to importance of
technicalfactorsinVMIprojects.

43

Figure28.TheimportanceoftechnicalandVMIspecificfactors(n=50),1notimportant,5veryimportant
VMIinitiativesareinformationintensiveandrequireeffectivedatabaselinkagesamongsupplychainpartnersto
facilitate information flows. Electronic and integrated means of data transmission is important to cut down on
datatransfertimeandentrymistakes,resultingsubsequentlyalsoinreductionofrequiredsafetystock,improved
inventoryturnoverratesandreducedobsolescence.Inventory,productioncontrolandplanningsystemsmustbe
online,accurateandintegratedtotakeadvantageofadditionalinformationavailable.
Itisclearthatduetothefts,damagesandotheruncontrollableeventsinashop,retailersareunabletoguarantee
that data provided to suppliers is 100% correct. This is why frequent stocktaking is necessary, correcting the
balancesinshops.
AllthisputshighrequirementsonqualityandreliabilityofIS.Thus,aproperITsolutionneedstobeselectedto
enable VMI to function correctly. With such complex IT solutions that incorporate different software, inter
organisational IS integration, it is obvious that executing a pilot project before deploying and escalating the
solutiontoallpartnersisnecessary.

44

APPENDICES
Appendix1.ECRthinking
Efficientconsumerresponsedescribesintercompanycooperationwhoseprimaryaimistoachievebetter,fasterandmore
costeffectivefulfilmentofconsumerwishes.

Definition
Efficientconsumerresponse(ECR)isdefinedastheoverallcompanyrelatedvision,strategyandpoolingofsophisticated
methods, which are aimed at removing inefficiencies along the output chain as part of partnership and trustbased
cooperationbetweenmanufacturers,retailandservicesproviders,takingintoaccountconsumerrequirements,toachieve
abenefitforallpartiesconcernedthatwouldnotbeachievablebyeachpartyalone.(Source:GS1Switzerland,website)

AimsofECR
ECRshowsitsmemberswaysofimplementingtheECRmodel.Theaimistogeneratecostsavingsandachievesalesgrowth
inthesupplychain.Theapproachisbasedonidentifyingpotentialandproblemareas,whichoffertherelevantscopefor
optimisation.Retailtradepartnersontheonehandandsuppliersand/orindustryontheotherworktogethertofinda
solution. This cooperationbased integration of all parties involved in the cycle means that advantageous and efficient
solutions are quickly developed, which offer a certain level of investment protection through standardisation. Their
implementation is a joint effort by all parties concerned. Such solutions have a positive impact on the parties directly
affectedaswellasandaboveallconsumers.

CRM

CRP,VMI,crossdocking,GS1128etc.

EfficientAssortment
EfficientProductIntroduction
EfficientPromotions

45

Appendix2.VMISampleContract
Can be found here:
http://links.telema.com/vmicontract

46

Appendix 3. Description of EDI Messages used in VMI

Inventoryreport(INVRPT)

SalesReport(SLSRPT)

The exchanged information will relate to inventories of raw

materials, manufactured articles, or other stock items, and can be
exchangedbetweenamanufactureranddistributor(wholesaler),or
manufacturer and consignment holder, etc. The message includes
functionality to differentiate classes of inventory, and to permit
financialvaluationofinventoriesfacilitatingpriceprotectionclaims,
auditing, statutory declarations, planning of production and
deliveries, etc. The specified quantities relating to a product can
indicate opening stock, closing stock, and goods movement
(receiptsorwithdrawals)ofheldinventory,foragiventimeframe.
Thespecifiedquantitiescanrelatedirectlytoaproductorpackage,
and may be subdetailed within different groups or classes, e.g.,
batch,age,valuation,location,etc.Foreveryspecifiedquantityitis
possible to indicate the relative package identifications of the
physicalunitsinvolved.

SalesreportisoneofthefocaldocumentsforDSDVMIprocesses.
This message provides product activity related to the sale of
productsorserviceintwomethods:1)bylineitemwithinaspecific
location,e.g.reportingeachproductsoldwithinaspecificlocation,
2)bylocationwithineachlineitem,e.g.reportingeachlocationand
quantitysoldforaparticularproduct.

From the point of view of industry, packaging might add

complexity. There are some packaged items delivered by vendor
which the retailer repacks into different units. For this purpose,
specific system settings must be entered. It is recommended that
therulesandresponsibilitiesformappingmasterdatabediscussed
bythebusinesspartners.

Order,OrderResponse,OrderChange

Themessagemaybesentfromabuyer,seller,distributor,totheir
supplier, distributor, manufacturer, or other third party. It is
assumedtherecipientwillperformanalyticalprocessingofthedata
in support of other business processes such as marketing, short
termplanning,orproductdevelopment.
This message provides the recipient with detailed information
relativetoaspecificproductsuchas:
Locationoftheactivity,e.g.saleorproductmovement
Specificpartiesinvolved,e.g.nameofcompanysoldto
Dateorperiodoftheactivity
Activityprice,e.g.sellingpriceandactivityquantity,e.g.quantity
sold
Promotionineffect,Valueofthesales,Periodicalturnover
Additional product information, e.g. product groups or id
numbers
Identificationofmarketsegmentorchannelofdistribution.
Summarisationofinformationforvariouslocations,e.g.salesfor
alllocationsinaregion.

Invoice(INVOIC)

TheOrdermessageistransmittedbythecustomertohissupplier
toordergoodsorservicesandtospecifytherelevantquantities,
datesandlocationsofdelivery.Themessagemayrefertoanearlier
Quotationreceivedfromthesupplierfortheorderedgoodsor
services.Themessagewillrefertothelocationandproductcodes
exchangedpreviouslyinthePartyInformationandPrice/Sales
CatalogueMessages.Itisintendedtobeusedforthedaytoday
orderingtransactionwith,asageneralrule,onePurchaseOrderper
delivery,perlocation.However,itispossibletorequestdeliveries
atseverallocationsandondifferentdates.

TheOrderResponseissentbythesuppliertohiscustomerin
relationtooneormoregoodsitemsorservicestoacknowledgethe
receiptoftheOrder,toconfirmitsacceptance,toproposeany
amendments,ortonotifynonacceptanceofallorpartofthe
Order.TheOrderResponsemayalsobeusedtorespondtoan
OrderChangeRequestMessage.Abuyer'sOrdermayberesponded
tobyoneormoreresponsemessagesaccordingtobusiness
practice.
TheOrderChangeRequestissentbythecustomertothesupplier
tospecifythedetailsconcerningmodificationstoapreviouslysent
Order.Thecustomermayrequesttochangeorcanceloneormore
goodsitemsorservices.

DespatchAdvice(DESADV)

The Invoice message is sent by the supplier to the customer

claiming payment for goods or services supplied under conditions
agreedbythesellerandthebuyer.Thissamemessagewithcorrect
data qualification also covers the functions of proforma invoice,
debit and credit note. The seller may invoice for one or more
transactionsreferringtogoodsandservicesrelatedtooneormore
order, delivery instruction, call off, etc. The invoice may contain
references to payment terms, transport details and additional
informationforcustomsorstatisticalpurposesinthecaseofcross
bordertransaction.

ReceiveAdvice(RECADV)

TheDespatchAdviceisamessagespecifyingdetailsforthegoods
despatchedunderconditionsagreedbetweenthebuyerandthe
seller,withthefunctionofadvisingtheconsigneeofthedetailed
contentsofaconsignment.Themessagerelatestoasingle
despatchpointandasingleormultipledestinationpoints,andit
maycoveranumberofdifferentitems,packagesororders.The
messageallowstheconsigneetoknowwhatmaterialswere
despatchedandwhen,allowingtheconsigneetopreparefor
receiptofthegoodsandtocrosscheckthedeliverywiththeorder.

TheReceivingAdviceisamessagespecifyingdetailsforthegoods
receivedunderconditionsagreedbetweenthebuyerandtheseller,
withthefunctionofadvisingtheconsignorofthereceivedcontents
of a consignment. The message relates to a single receiving point
andasingledespatchpointanditmaycoveranumberofdifferent
items, packages or orders. The message allows the consignor to
know what materials were received/not received against the
originalorderandwhatmaterialswereaccepted/notaccepted.This
information allows the consignor to prepare an invoice for the
customer.

TheDespatchAdvicemaybesentforeitherthedespatchofa

47

deliveryconsignmentofgoodsorthedespatchofareturn
consignmentofgoods.Identificationoftransportpackagingmaybe
achievedthroughtheuseoftheSerialShippingContainerCodes
(SSCC).

RemittanceAdvice(REMADV)

The Remittance Advice is a communication between buyer and

sellerwhichprovidesdetailedaccountinginformationrelativetoa
payment,orotherformoffinancialsettlement,onaspecifieddate
fortheprovisionofgoodsand/orservicesasdetailedintheadvice.
The message may be initiated by either the buyer or seller. The
RemittanceAdviceisanoticeofpaymenttobemade,bothnational
and international, covering one or more transactions. Each
RemittanceAdviceiscalculatedinonlyonecurrencyandrelatesto
only one settlement date. References to payment orders may be
included.

48

Appendix4.MasterDataManagement:Background
Draft!Needsreview!

ProductMasterDataManagement:PreparationforMDManagement8
1.

Quantify or qualify the business problems resulting from product data problems.Organizations
oftenrecognizeproblemswiththeirproductinformationwhentheyfirstappearasproblemswithkey
business processes. After a while you realize that the common denominator among these process

8http://www.enterworks.com/preparingforpim/

49

problemsisproductinformationproblems.Havingidentifiedthese,itwillbeeasiertoquantifythem
inordertobuildthebusinesscaseforcorrectingthem.
2.

Identifyparticipants,championsandsponsors.Animportantpointtorememberisthatyoursisntan
ITdrivenorITsponsoredundertaking.YoullwanttoincludeITpersonnel,butyouandyourbusiness
colleagues need to be the motive force. You need to identify the key executives who are most
affectedbyinefficientbusinessprocessesresultingfrombadproductdata.Approachthosewiththe
mostpainanddiplomaticallyrecruitthemasasponsororchampionofyourPIMinitiative.

3.

Identify locations and sources of product data.Youll also need to identify the attributes,
descriptions,images,andothercontentassociatedwiththedata.Beginbycreatinganinventoryof
wheretheproductcontentoriginates,forwhatpurposeitwasoriginallycreated,whereitsmanaged,
whichpeopleandprocessesuseit,andwhichmediaandchannelsconsumeit.Ideallythemetadata
fortheseassetsarestoredandmanagedinaregistryorrepository,whichwillhelpinidentifyingsome
oftheseaspectsofthedata.

4.

Createadataqualityframework.Youneedclean,standardized,rationalized,andnormalizeddataas
you start your PIM initiative. This means you also need to determine what constitutes quality data
according to your requirements and establish a framework that defines and quantifies those
metrics.Thesemayincludecompleteness,accuracy,consistency,continuity,timeliness,redundancy,
and uniqueness, among others. Its up to each organization to identify and define the metrics that
mattermosttotheprocessestheyreaddressing.

5.

Performadataqualityaudit.Theexerciseofcreatingyourdataqualityframeworkshouldhighlighta
numberofareaswheredataproblemsneedstobefixed.Havingidentifiedthese,youneedtoaudit
your data to determine at which points they fail to live up to the metrics in your data quality
framework. The report produced by this audit will help quantify the level of data quality work that
needstobedoneinadvanceoftheactualPIMdeployment.

6.

Establish a data governance council.Your organization may not be ready for a formal data
governance council with executive overseers and teams of data stewards. It may be best to simply
repurpose the existing team of process participants and sponsors into a data governance
committee for data relating specifically to your PIM initiative. Note that over time, this group may
expand into amore formaldatagovernance council,especially asyour efforts intersectand overlap
withthoseofotherlikemindedpeopleinyourorganization.

50

Appendix5.Glossary
Needsreview
Term

Term
ABCanalysis

Unpackedgoods

BBD

Explanation

Classificationofitemsinto
salescategories

Example:Aitemsaccountforthefirst70%ofsales,Bitemsforthenext

25%andCitemsfortheremaining5%ofsales.

Itemswhicharedeliveredtotheretailerswarehouseintradingunitsandarethen
forwarded to the retailers branches in consumer units. This produces started
packages,whichcauseproblemsinthedataexchangebetweenvendorandretailer.

Bestbeforedate

Date which indicates by when a food product must be consumed if stored

appropriately (in particular, ensuring that the product is stored at the
temperaturementionedinconnectionwiththebestbeforedate)toensurethere
isnosignificantlossofflavourandqualityaswellasrisktohealth.

BMI

Retailermanagedinventory

Thetechnologyofretailermanagedinventoryrepresentsasecondsubformof
CRP technology of vendor managed inventory (VMI) alongside comanaged
inventory (CMI). In contrast with VMI and CMI, the retail company alone is
responsibleforitsorders.Thevendorcanonlyassumealimitedadvisoryroleifat
all.InthecaseofBMI,theretailerorientateshimselfusingahighperformance
ITbased inventory management system, since the strategic importance of
orderinghasbeenrecognised.

BestPractice

Bestpracticedescribesproven,optimum and/orexemplarymethods,practices
andproceduresusedincompanies.Ifacompanyadoptsabestpracticeapproach,
it uses, for example, tried and tested costeffective procedures, technological
systems and business processes which make it a model company for others, at
leastinthekeyareasofoperations.

Bulkgoods

CMI

Bulk describes goods which have yet to be definitively packaged for

selling.

Comanaged inventory

Togetherwith retailermanagedinventory(BMI),comanagedinventory represents

avariantofthe vendormanaged inventory approach. Thismethod relatesto the
basicstrategyofefficient continuousreplenishmentandformsthelinkbetween
retailer managed inventory (BMI) and pure vendor managed inventory (VMI).
Similar to the BMI approach, the retailer has ultimate responsibility for order
processing. However, the vendor is involved in the order process to a greater
degree.Consequently, the retailershares moreinformation with the vendor and
mayalsoacceptorderproposalsthevendorhasprepared,whichareforwardedto
theretailerviaEDIand/oremail.Unlike VMI,theretailcompanyhasastronger
controlrolewithCMI.

CPFR

CU

Further development of the quick response or ECR concept, which takes

particular account of improved planning / forecasting, especially in terms of
promotions.

Continuousreplenishment
process

Aprogrammewhichdescribestheactivitiesandresponsibilitiesofretailerand
vendor, in order to ensure continuous replenishment of the distributors
warehouses.

CRP

Collaborativeplanningfore
castingandreplenishment

Consumerunit

DC

Distributioncentre

51

Term
DOS

Explanation

DaysofSupply

EANCOM

EANandCOMmunication:Standardfortheelectronicexchangeofdata,whichisanofficialUN/
EDIFACTsubsetandismadeavailablebyGS1Internationalforcrosssectorutilisation.EANCOMis
therecommendedEDIstandard forECR.

Earnings before interest EBITisafinancialratioandindicatestheoperatingprofitofacompanyforaspecificperiodof

andtaxes
time.

Efficientconsumerresponse EfficientConsumer Response(ECR)isajoint tradeandindustrybodyworkingtowardsmaking

the grocery sector as a whole more responsive to consumer demand and promoting the
removalofunnecessarycostsfromthesupplychain.

EBIT

ECR

EDI

Electronicdatainterchange

FMCG

FTE

Fast
moving
consumergoods

Fastmovingconsumergoodsareconsumergoodsfordailyuse,such asfoodproducts,personal
hygiene items, cleaning products etc., which consumers buy frequently (e.g. weekly),
spontaneously,generallyroutineitemsboughtwithout givingthepurchasemuchthought.

Fulltimeequivalent

Fulltimeemployeeonaprojectlastingalimitedperiodoftime;
1.0signifies 100%.

FTL

Fulltruckload

A full truck load isthe quantity of goods, which iscollectedfor transport from aforwarder
(consigner) and transported to the recipient without transhipment on ameans of transport
andwhich,unlikepartialdeliveries,alonefillsthemeansoftransport.TheEnglishtermfulltruck
load(FTL)isgenerallyusedinconnectionwith trucktraffic.Withregardtocontainershipments,
thetermfullcontainerload (FCL)isusedandinrailtraffic,thetermwaggonload.

GS1

GlobalStandardOne

GS1(Global StandardOne)isaworldwide organisationwhichdevelopsandimplementsglobal

standards for improving output chainsandwhich isresponsible worldwide for issuingglobal
tradeitemnumbers.

GTIN

Globaltradeitemnumber

The GTINisanidentification numbermanagedandissuedbyGS1,which facilitatesthereliable

identificationofproductsandpackagesworldwide.GTINisagenerictermforthecodesystemof
barcodeswith EAN,theUCCcodeorEPC.

IdealMessage

KPI

Keyperformance indicators

MessagesthatsimplifyelectronicdatainterchangeviaEANCOMmessaging.

Inbusinessadministration,keyperformanceindicatorsaregenerallyratiosthat relateto the

success,performanceandcapacityutilisation ofacompany,itsindividualorganisationalunits
orthatofamachine.

OOS

Outofstock

Outofstockshelfgap
Inretail,thetermshelfgapdescribesthepartofashelfwhichisnolongerfilledwiththe
intendeditem.

OSA

OnshelfAvailability

PULL

Whenusingthe pull principle,production processesaretriggered by demandthat leavesa

gapininventorywhichinturnisthenclosedbyaproduction process.

Thepushprinciple(deliveryprinciple)isaproduction managementsystemwhere,unlikethe
pullprinciple,ordersarepushedthroughthelogisticschain.Aspecifiedplan(e.g.production
ordistribution schedule)providesthetriggerfortherelevantactivities.

PUSH

RACI

Responsible,
accountable, consulted,
informed

RACIdescribesamethodforanalysingandillustratingresponsibilities.

52

SAPR/3

SAP ERP is the main product of German software company SAP AG. ERP stands for enterprise
resource planning. It is a corporate information system which facilitates an overview of all
departmentsofacompanythat arerelevanttothebusiness asawhole.

SC

Supplychain

Sourcing

Sourcing is a purchasing strategy, or subdivision of strategic purchasing management and,

unlikelocalpurchasing,examinesinternationalstrategicpurchasingactivities.
Global sourcing describes more than simply crosscountry purchasing and indicates
comprehensivestrategicpurchasingwith aworldwidefocus.

S&OP

Sales
operations
planning

and

Thisprocesssupportstheintegrationandcoordinationofvariousdivisionsofacompanyand
theirconsistentalignmentwith corporateaims.
Itproducesagreaterbenefit,strengthenscompetitivenessandincreasesprofitability.

TU

Transportunit

UN/EDIFACT

UnitedNationsElectronic
Data Interchange For
Administration,
CommerceandTransport

EDIFACT is a crosssector international standard for the format of electronic data in business.
EDIFACTisoneofseveralinternationalEDIstandards.CEFACT,aUNorganisationwhichisaffiliated
toUNECE,isresponsiblefortheEDIFACTstandard.

VMI

Vendormanagedinventory

Vendormanagedinventory(VMI)isalogisticsmanagementtoolwhichenhancesperformance
alongthesupplychain.Thevendorhasaccesstothecustomersstocklevelanddemanddata.

53

Appendix6.Demosoverview/VMIserviceproviders

Figure46:LinkstoVMIproviders

Vendor

Link

Assessment
description of
operation

Integratedsolution

Figure47:ListofITproviders

Company
ActiveScrew&Fastener

Offering

Vendorinventorymanagement

Arvato(BertelsmannGroup)
AvercastLLC

VMIsoftware

VMIsoftware

54