7.8 Supply Chain Collaboration
Vendor Managed Inventory (VMI)
VMI is an advanced supply chain relationship where a vendor manages and maintains agreed inventory levels at the customer’s location, leveraging access to real-time inventory data.
Key benefits
For vendors:
- Motivation to ensure fully stocked shelves and discontinue slow movers
- Opportunity for comprehensive product training and support
- Improved inventory visibility and demand forecasting
For customers:
- Reduced workload in inventory management
- Fewer errors and faster goods flow through EDI integration
- Automated replenishment based on point-of-sale data
- Access to vendor expertise and on-site support
VMI fosters closer vendor-customer collaboration, enabling optimized inventory levels, reduced stockouts, and enhanced supply chain efficiency.
Successful implementation requires trust, transparency, effective communication, and robust information sharing between partners.
VMI represents a strategic approach to collaborative inventory management and operational excellence across the supply chain.
Collaborative Planning, Forecasting, and Replenishment (CPFR): Aligning Supply Chain Partners
CPFR enables trading partners (manufacturer and distributor/retailer) to collaborate on forecasting and order planning by:
- Sharing point-of-sale data, promotion plans, inventory status, and forecasts.
- Comparing shared data with manufacturer’s forecasts and capacity.
- Collaboratively resolving discrepancies and agreeing on final forecasts/replenishment plans.
Key benefits
- Inventory optimization and reduced stockouts
- Improved demand visibility for better production planning
- Proactive problem-solving for potential issues
- Strengthened partner relationships and trust
Effective CPFR implementation requires commitment, trust, information sharing, and robust technology platforms between partners.
By aligning forecasts and replenishment strategies, CPFR helps optimize operations, reduce costs, and enhance customer service levels across the supply chain.
Collaborative Planning, Forecasting and Replenishment (CPFR) is an arrangement where two trading partners in a supply chain collaborate to agree on forecasts and orders between the manufacturer and distributor/retailer. The distributor/retailer will have collected POS data and added any additional information, such as promotion plans, inventory status or forecasts. That information gets shared with manufacturers who will then compare it with their own forecasts and capacity. Both teams can collaborate to solve any discrepancies, eliminate gaps and agree on a final set of numbers. Collaborating in this way will enable both firms to reduce inventory as well as reduce problems such as shortages and capacity problems.
Measuring Supply Chain Performance
Video: “How to Measure Supply Chain Performance” by Skillsoft YouTube [3:11] is licensed under the Standard YouTube License. Transcript and closed captions available on YouTube.
Inventory Turnover: A Key Performance Indicator for Supply Chain Efficiency
Key Performance Indicators are measurements used to evaluate supply chain performance. One of the ways to evaluate the supply Key Performance Indicators (KPIs) are essential measurements used to evaluate supply chain performance. One crucial KPI is inventory turnover, which is calculated using the following formula:
[latex]\text{Inventory Turnover}=\frac{\text{Cost of Goods Sold}}{\text{Average Aggregate Inventory Value}}[/latex]
The “average aggregate inventory value” refers to the total inventory held in stock, including raw materials, work-in-process, and finished goods, valued at cost.
Inventory turnover indicates an organization’s policies and practices, reflecting its ability to purchase materials, produce, and sell products in a timely manner. A higher inventory turnover value signifies that the organization has more effectively replenished and sold its inventory within a given period, resulting in better cash flow.
It is important to note that the interpretation of high or low inventory turnover values is relative to the specific industry. For example, the dairy (milk) manufacturing industry typically has an annual inventory turnover of around 23, while grocery supermarkets have a turnover of 14.7, and the automotive industry has a turnover of 4.8. Industries with higher volume and lower margins generally have the highest inventory turnover.
Analyzing inventory turnover provides valuable insights into supply chain efficiency and inventory management practices. A high turnover rate may indicate effective inventory management and a well-optimized supply chain, while a low turnover rate could suggest potential issues such as overstocking, slow-moving inventory, or inefficient production processes.
By monitoring and optimizing inventory turnover, businesses can improve their cash flow, reduce carrying costs, and enhance overall supply chain performance. However, it is crucial to consider industry-specific factors and benchmarks when interpreting and setting targets for inventory turnover.
Example
NED’s Food Supply is a supplier to restaurants and institutions for frozen foods, meats, fish, canned and fresh fruits and vegetables. Here is an analysis from the past two years regarding their inventory management. In which year was their supply chain performance better?
| Last year | Two years ago | |
|---|---|---|
| Cost of goods sold | 17,550,000 | 16,255,000 |
| Average aggregate inventory value | $1,650,000 | $1,763,350 |
Solution
Inventory turns for last year = 17,550,000 ÷ 1,650,000 = 10.64 turns
Inventory turns for two years ago = 16,255,000 ÷ 1,763,350 = 9.22 turns
Last year, their inventory turnover was faster. If customer service was equivalent in both years, then their performance was better last year than it was two years ago. This may have resulted in customers receiving fresher foods as well.
Days of Supply
Another related performance measure is days of supply:
[latex]\text{Days of Supply}=\frac{\text{Average Aggregate Inventory Value}}{\text{Annual Cost of Goods Sold}}\times365\;\text{days}[/latex]
Example
J’s Custom Automotive Finishing has calculated that his annual cost of goods sold at 45,000,000. His average inventory value in 2019 is:
| Production components | 2,350,000 |
|---|---|
| Production supplies | 450,000 |
| Finished goods | 225,600 |
| Total aggregate inventory value: | 3,025,600 |
Solution
Days of supply = (3,025,600 ÷ 45,000,000) × 365 = 24.54
This measure can be thought of as the amount of inventory sitting in the building at any one time. A lower number is better for measuring the efficiency of the inventory. This implies that goods are purchased more frequently and that less time is spent in the facility before being converted into sales.
There are other ways to measure supply chain performance as well. In a warehouse or distribution setting, the fill rate is an important measure. It is the percentage of customer orders that are filled from on-hand stock. In a manufacturing setting, a measure such as the percentage of orders delivered on time is an important indicator of customer service level.
Socially Responsible Supply Chain Management: Embracing Ethical and Sustainable Practices
Socially responsible supply chain management encompasses a range of practices promoting ethical, environmentally conscious, and socially responsible operations throughout the supply chain.
The main areas of focus include:
- Organizational practices: Implementing policies and procedures that foster transparency, accountability, and good governance within the organization and its supply chain partners.
- Ethical practices: Adhering to ethical standards and codes of conduct that promote fair business practices, anti-corruption measures, and responsible sourcing of materials and components.
- Environmental practices: Adopting environmentally sustainable practices, such as reducing carbon footprint, minimizing waste, and promoting the use of renewable resources and energy-efficient processes throughout the supply chain.
- Human rights and working conditions: Ensuring that supply chain partners respect and uphold human rights, provide fair working conditions, and prohibit practices such as child labour, forced labour, and discrimination.
- Occupational health and safety: Prioritizing the health and safety of workers by implementing robust occupational health and safety measures, providing appropriate training, and ensuring compliance with relevant regulations.
- Community engagement: Establishing positive relationships with local communities by supporting community development initiatives, promoting local employment, and minimizing negative environmental and societal impacts.
By embracing socially responsible supply chain management practices, organizations can mitigate risks associated with unethical or unsustainable practices and contribute to the well-being of society and the environment. This approach can enhance brand reputation, foster customer loyalty, and attract socially conscious investors and stakeholders.
Implementing socially responsible supply chain management requires a comprehensive strategy, strong leadership commitment, and collaboration with supply chain partners. It involves setting clear goals, establishing monitoring and reporting mechanisms, and continuously improving practices to align with evolving social and environmental standards.
Video: “Building A Sustainable (Responsible) Supply Chain Management System” by InterPraxis Sustainability [6:23] is licensed under the Standard YouTube License.Transcript and closed captions available on YouTube.
The following table (Ciliberti et al., 2008) summarizes activities and practices considered good examples for the CSR areas listed above.
| Relevant CSR Areas | Sample Practices |
|---|---|
| Organizational Practices | • Determining CSR goals for the purchasing function • Determining and defining roles and responsibilities of human resources related to CSR in logistics • Providing relevant training in CSR to the suppliers • Sharing of CSR activities and practices with all relevant stakeholders • Implementing a mechanism to receive feedback from stakeholders regarding CSR practices |
| Ethical Practices | • Not accepting gifts, free services, etc. from suppliers (especially during the supplier selection process) • Not creating illegitimate pressures on suppliers • Not sharing price and service information about suppliers with other irrelevant stakeholders • Not favouring any particular supplier just because of managers’ preferences and assuring a fair selection process • Assuring all departments meet ethical standards in the independent purchasing process • Not creating illegitimate advantage in competition by using contract items • Not giving out wrong information on purpose • Not using specific items pointing out specific suppliers in contracts |
| Environmental Practices | • Purchasing and using recycled materials for packaging • Supporting and encouraging suppliers to reduce waste (especially hazardous waste) • Putting special emphasis on producing recyclable and reversible materials in production and design • Meeting standards for protecting the environment in the processes of lifecycle management, production, packaging and storing • Supporting suppliers to implement processes that are appropriate for sustainable environmental protection |
| Practices of human rights and working conditions | • Not keeping some suppliers out of the cycle, just because they have managers from different backgrounds • Having procedures and also having mechanisms to monitor providing equal opportunity for each employee working in all supplier companies • Having appropriate procedures in place to assure that all employees can benefit from all their legal rights, are working in accordance with rules, regulations and national/ international standards • Assuring that physical and psychological working conditions comply with all rules and regulations in place |
| Practices of occupational health and safety | • Having appropriate procedures in place to ensure that working conditions do not jeopardize human health and safety • Assuring that all safety, security and protection measures are in place for all activities • Having procedures in place to ensure that sensitive and delicate products are stored under appropriate conditions |
| Practices to establish relationship with society | • Developing and carrying out programs for training and development of local suppliers • Actively participating into and organizing not-for-profit social activities, such as volunteer work, charities, public auctions, etc. • Supporting sport activities and public education |
Among those aforementioned activities, ensuring that all activities and functions comply with national/international rules, regulations and standards and working with suppliers that fulfill the same requirements constitute the most important factors for CSR in supply chains. This issue is also important to stay competitive in market and to have a sustainable growth in terms of strategic perspective.
Video: “Business is about purpose: R. Edward Freeman at TEDxCharlottesville 2013” by TEDx Talks [17:38] is licensed under the Standard YouTube License. Transcript and closed captions available on YouTube.
“4 Supply Chain” from Introduction to Operations Management Copyright © by Hamid Faramarzi and Mary Drane is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.—Modifications: used section Supply Chain Collaboration, some paragraphs rewritten; added additional explanations.
