The Difference Between Walmart And Procter Gamble Information Technology Essay

In late 1980’s, Procter & Gamble, the manufacturer and Wal-Mart, the distributor started to practice vendor managed inventory (VMI) partnership. Their success on increasing efficiency of supply chain immediately trumpeted other organization like Campbell Soup, Johnson & Johnson, Glaxosmithkline¼ŒElectrolux Italia¼ŒNestle and Tesco, and also Boeing and Alcoa, to apply VMI approach.

VMI is a business model which is first implemented and common among grocery industry. Vendor or supplier usually refers to manufacturer.

Instead of having the customers, often distributors, to place order to vendors,, as in traditional replenishment process, VMI created a value added service in which vendors have full responsibility on maintaining agreed level of inventories for distributors. Through VMI software, manufacturers either able to monitor and access distributors actual inventory level, or distributors will send sales and inventory data via Electronic Data Interchange (EDI) or internet on pre-arrange schedule, typically on daily basis. Manufacturers then make resupply decisions regarding order quantities, timing, and shipping based on mutually agreed stock levels, fill rates, and transaction costs.

Yes, the researcher agreed that VMI provides significant benefits to an organization. Therefore, exploring the benefits arise from implementation of VMI, would be the next focus for this paper. The paper also objectives to examine the disadvantages involved in the application of VMI for both distributors and manufacturers.

2.0 : VENDOR MANAGED INVENTORY

Advantages

The advantages were introduced in terms of manufacturers, distributors, not to forget dual benefits.

2.1.1 For manufacturers

Increased productivity

More efficient own inventory control

Increased customer relationship

Improved market analysis

Increased sales

Cost reduction

VMI Benefits for Manufacturers

Figure 1: VMI Benefits for Manufacturers

Source: The Researcher

Cost reduction

Administration cost, operating cost, transportation cost and many more are decreased because of lesser order problem like bad data, and decreasing unexpected order.

Increased sales

This is the quickest advantage as sales could be rise to 5-25%. This mainly due to increased sales of their customers, contributed by lesser stock out problems, together with improved product mix, as a result of better demand visibility. Market share also increased because distributors could experience lower cost, greater profitability, and improved service from manufacturers. Another factor is better collaborative planning for special sales such as promotion.

Improved market analysis

More frequent and direct communication allowed better insight in customer demand. This enables easier market analysis and created opportunities to provide other value added services.

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Increased customer relationship

Manufacturers secured its customers by providing continuous supply, avoiding out of stock problems. VMI also assured long term relationship together with steady and predictable income as long as manufacturers still carrying the task of maintaining a predetermined stock for its customers, often a distributor.

More efficient own inventory control

With the ability to monitor and keep track its customer’s actual sales and inventory, manufacturers able to forecast demand, hence better plan and control its own inventory, for instance, keeping just enough stock for manufacturing and resupply for its customer. Increased communication also allows promotion to be easily incorporated into inventory plan.

Increased productivity

Manufacturer’s productivity is increased because monitoring customer’s stock regularly enable manufacturers to control its own inventory more efficiently, thus manufacturing operations could be schedule more productively.

2.1.2 For distributors

Improved service

Increased

sales

Cost saving

Lesser stock-out

Lower inventory level

VMI Benefits for Manufacturers

Figure 2: VMI Benefits for Distributors

Source: The Researcher

Lower inventory level

Manufacturers have greater responsibility to ensure availability of inventories, by ordering replenishment when inventories fall below order point. Frequent review of inventories and demand information enable manufacturers to more accurately control lead time component of order point calculations, hence reducing safety stock.

Lesser stock-out or shortage

The theory and reasons is just the same as for reducing safety stock and inventory level, which is automatic replenishment by supplier before stock-out, and better order calculation due to increased visibility of actual demand. Having manufacturers to monitor its own items also allows better respond to unexpected demand compared to typical distributors managing bulks of items from different manufacturers.

Cost saving

Administration cost is reduced. Since manufacturers in charge of stock replenishment, the cost involves for managing replenishment, generating purchase order and other administration task is eliminated. Distributors will then require lesser time and effort in ordering. Cost involved in bad or wrong order is eliminated too. VMI also decreased cost of carrying stock.

Increased sales

VMI leads to fewer out-of-stock situations. This simply means higher sales, as lesser sales opportunities are lost, and customer loyalty is improved. Increased visibility in demand ensured the right products always available at right time and right place. Frequent communication also allow better collaborations with suppliers in planning for new product introduction, promotions, and exceptional demand, allowing distributors to enjoy full advantage of special sales opportunities.

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Improved service

Having correct items at correct moment improved overall service level. Manufacturers practicing VMI also keen to provide better service to distributors.

2.1.3 Dual Benefits

In addition to the above advantages, both manufacturers and distributors benefit from shortening of supply chain. Human data entry errors were avoided through computer to computer communication, which also improve processing speed. Next, overhead is lowered due to automated VMI. Another consequence would be stronger ties and true partnership between manufacturers and distributors. Furthermore, timing of purchase orders was stabilized on a predefined basis, for example once weekly purchase order cycle.

Disadvantages

The researcher also identified some disadvantages. Firstly, manufacturers might need additional effort and cost to undertake resupply activities which is previously carried out by distributors themselves. Therefore, manufacturers must guaranteed substantial amount of gross profit and sales to cover those extra expenses.

Secondly, since distributors are excluded from forecasting demand, inaccurate forecast might occur.

In terms of distributors, dependency on single source of supply gives disadvantages when suppliers unable to meet its commitment. Distributors also faced potential in losing confidential information since manufacturers are given access to its data. There is also possibility of job losing as replenishment tasks are transferred back to manufacturers.

Implementing VMI also means distributors unable to enjoy bulk purchase discount, promotion, and forward buying.

Another risk is that lacking of advanced information technology could results in outdated and incorrect information sharing. Besides cost of technology, application of VMI also involved cost of training and changing organization.

Moreover, the success of VMI is hugely determined by the strength of relationship between manufacturers and distributors. For instance, lack of trust in data exchange could leads to ineffective implementation, including inventory invisibility and inventory imbalance.

Since VMI increased dependency on both parties, switching cost is raised and these created difficulties in switching. Flexibility is loss through VMI because special events or promotions required beforehand communication in order to eliminate replenishment mistake.

The next concern is that VMI which encouraged lower inventory contributed to loss of shelf space at distributors selling area. This decreases attention of their buyers, hence market share are loss.

However, they are ways to overcome these disadvantages. Take the above example, shelf space could be filled with other items from same vendor. Furthermore, achieving mutual agreement before applying VMI would creates mutual trust, therefore strengthens relationship and partnership between manufacturers and distributors, thus better price and transaction, resulted in better service to the end customers, which will then generate significant benefits for both parties.

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3.0 : CONCLUSION

Procter & Gamble and Wal-Mart appears to be the pioneer and master of VMI, a supply chain practice which is popularized among grocery industry since late 1980’s.

As oppose to traditional business model where distributors initiate purchasing order, buying decision in VMI are shifted back to vendors, often manufacturers. This is an automated process where manufacturers automatically make resupply decision, ensuring certain amount of stock is available for distributors to meet consumer demand. Manufacturers are given access to real-time sales and inventory level, where electronic data will be sent by distributors to manufacturers through EDI or internet. Under VMI partnership, both manufacturer and distributor are bound by agreement which determines information like inventory level, refill rates, cost, and shipping.

The researcher agreed that VMI created numerous advantages for both manufacturers and distributors. Examples include increased sales, cost reduction, lower inventory level, lesser stock-out, improved service, improved productivity, improved market analysis, shortening of supply chain, improved processing speed, stronger partnership and many more.

Nevertheless, VMI have disadvantages too. These incorporate additional effort and cost for manufacturers, inaccurate demand forecast, dependency on single source of supply, loss of confidential information, loss of job, loss of purchase discount, outdated and incorrect information sharing due to lacking of advance technology, cost of training, changing organization, increased dependency, increased switching cost, loss of flexibility, loss of shelf space, and loss of market share.

As conclusion, the researcher recognized that VMI could be structured properly in order to maximize its advantages and minimize its disadvantages. To illustrate, good flow of information is key to success in VMI application. Thus, it is necessary to allow information sharing by ensuring an open communication channel. Implementing a well-structured VMI also required good understanding of VMI as well as training of staff. Other measures to avoid VMI failure includes clarify expectation, and achieve an agreement between manufacturers and distributors regarding factors such as lead time, cost, and information sharing.

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