Simplifying the Supply Chain
Here’s why Vendor Managed Inventory makes sense…
According to Booz & Company, the growth in private label purchasing started before the recession and, even as economic indicators highlight a positive swing, private label growth shows no sign of a major slowdown. Consumer behavior is changing. In fact, according to a February 2010 Private Label Manufacturers Association report, more than 57 percent of shoppers consider themselves frequent store-brand buyers.
The growth in consumer acceptance has been a boon for the industry and has uncovered challenges an increase in demand brings. Simultaneously balancing inventory, meeting customer service goals and maximizing production efficiencies all increase supply chain complexity. To reduce risk, gain more control and ensure in-stock availability, private label manufacturers have turned to vendor managed inventory (VMI) programs with key retail customers.
The combination of a growing, highly competitive market and an increase in consumer expectations has created five key challenges for private label manufacturers. The goal is to adopt processes that identify potential roadblocks and mitigate any issues before they cause disruption to partners and customers.
Ensure Product Availability – With the increasing rate of new product introductions (NPIs), complexity and delays in the supply chain threaten product availability.
Reduce Volume of Obsolete and Markdown Items – The life cycles of many goods, be it due to the latest trend or marketing promotion, can make it difficult to plan accurate inventory levels and steady product velocity.
Prevent Margin Erosion – Increased competition and promotions, more stringent retailer requirements, and uncertain energy and production costs are among unavoidable challenges that contribute to shrinking margins across the industry.
Shorten Lead Times – In an effort to speed products to market, private label manufacturers must organize, optimize and synchronize the supply chain including timely coordination and increased visibility with partners.
Accelerate Replenishment – Many retailers have implemented strategies to improve replenishment and ensure customer service levels are met.
Private label manufacturers are selectively turning to VMI to maintain competitiveness, strengthen relationships with key customers and implement more efficient processes that reduce the risks associated with the above challenges. A tightly integrated, well-executed VMI program can significantly help reduce costs, increase inventory turns and boost visibility to adapt quickly with changing market conditions. The following examines three factors currently driving VMI adoption.
Limited Distribution, Greater SKU Portfolios
Private label manufacturers face the unique challenge of producing several SKUs for a product group to meet customer requirements for distinct packaging and slight formula variations. If your manufacturing process permits, you may leverage postponement strategies that delay product packaging/labeling and reduce the risk of inventory obsolescence. However, what happens if demand shifts to another product and you did not see it coming? Quite simply you are often stuck with the excess inventory and will have to rely on promotions to move it. If you over produce, you can’t simply reallocate distribution to another customer – after all, these products carry the retailer’s brand. The growth in private label demand for unique offerings has led many manufacturers to produce more SKUs per product which increases production complexity and requires highly accurate forecasting to avoid the pitfalls of manufacturing changeovers.
Greater forecast accuracy ensures you know just how much to produce, in what timeframe and for which customers. Now that you have this information you must make sure your suppliers can meet your needs and your customers are in the loop.
Collaboration
Operate on an island and you quickly learn life of sun and sand isn’t always warm breezes. In its simplest form, VMI connects multiple trading partners to enable collaborative supply chain planning and execution. The extra effort VMI can require ensures all parties operate in real-time against a common plan, understand the targets and can properly plan to meet customer service goals. When collaborative VMI is done well, both the private label manufacturer and retailer grow volume and increase profitability over time.
Working up and downstream, private label manufacturers are able to take in demand signals from the retailers, apply these updates to the manufacturing plan and then seamlessly communicate this information with suppliers. All parties involved have the knowledge they need to reduce the likeliness of stock-outs. The manufacturer reduces the risk of owning the inventory by ensuring what is produced is sold.
Today’s successful VMI programs incorporate many of the principals established with Collaborative Planning, Forecasting and Replenishment (CPFR) and are more proactive than reactive. Electronic collaboration significantly reduces the management effort and focuses the team on resolving exceptions to the agreed plan. In the grocery industry, promotions can drive dynamic swings in demand (often as much as 80%) for both private label and branded goods. Working with your key customers to gain insight into anticipated changes in volume helps minimizes overstock and obsolescence. In addition, you and your partners form a true relationship. You all have the same goal in mind, satisfy the end consumer and make sure you consistently meet their needs.
More Control
Through VMI, the private label manufacturer has more visibility of current and future demand and therefore more control over the product from manufacture to customer delivery. You control the production, distribution and may even control the display of your merchandise. The manufacturer has more visibility into promotions, category plans, and point-of-sale data which allows for greater accuracy in forecasting as well as synchronizing inventories to identify trending patterns, replenishment needs, etc.
Knowledge is power and the data provided to the private label manufacturer can also help develop promotion plans, measure the success of promotions, drive new product innovation, ensure product freshness, and increase inventory velocity. As a manufacturer, VMI gives you the platform to become more proactive and efficient. Instead of waiting on the delivery of forecasts, buying behavior and inventory levels to develop manufacturing plans, the private label manufacturer can now proactively obtain this information and stay ahead of the curve.
Margins can be thin and competition for shelf space fierce. SKUs are proliferating with a steady stream of product variations entering the market. There are many factors that impact the success of the private label industry and a strong understanding of what VMI is, how it can help improve operations and impact costs will take your company a long way to improve manufacturing planning, inventory management and ensure you are not caught off guard as demand shifts.
*Karin L. Bursa is vice president of marketing at Logility, a provider of collaborative supply chain management solutions. Ms. Bursa has more than 22 years of experience in the development, support and marketing of software solutions to improve and automate enterprise-wide operations. For more information, please visit www.logility.com.
