Report Vendor Management

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Acknowledgement

Letter of Acknowledgement.

September 24th, 2011

It has been a pleasure to be Dr. Masood Subzwari's students. We would like to thank

him for giving us the chance to do this report as a team work.

His lectures have been very interesting and motivating. We are extremely grateful tohim and appreciate his efforts for providing us full support, encouragement and

valuable guidance.

Sincere regards,

Sara Ahmed

Mamoona Badar


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Vendor Management

Introduction

Vendor Management is a structured approach of receiving the best service and value from asupplier. The core of such a program is the establishment of an ongoing communication channel

with a vendor.

Vendor Management ensures that a vendor will continue to provide quality goods and services at

agreed upon pricing, throughout the term of a written agreement. It also creates the appropriate

forum to proactively address changes in business needs as they arise.

The individual, function, department or college authorizing and requesting supplies or services from

a vendor is required to appoint an Agreement Administrator or individual responsible to oversee the

work to be performed by the vendor for the specified contract or agreement.

VENDOR:

A vendor, or a supplier, is a supply chain management term meaning anyone who provides goods or

services to a company. A vendor often manufactures inventorial items, and sells those items to a

customer.

VENDOR MANAGEMENT:

It is just as important to communicate with your suppliers and vendors as it is to communicate with

your customers. Establishing the proper communication channels and information flows between

you and your suppliers can lead to increased efficiencies, reduced costs and better customer service.This section will cover the simple communication methods (i.e. telephone) and other ideas that will

allow your company to build a win-win relationship with your suppliers and vendors.

GOALS:

These goals are:

Establishing Goals- Just as employees need clearly established goals, operations need clearly defined

performance parameters. When selecting or managing vendors, vendor managers must optimize their

opportunity to achieve these goals by using third parties companies.

Selecting Vendors- The fine art of vendor management is essential to optimizing operational results.Different vendors have different strengths and weaknesses, and it is the vendor managers


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responsibility to match the right company with the desired performance characteristics. Failure to

consider this comprehensively could lead to complete failure.

Managing Vendors- On a daily basis, vendor managers must monitor performance, provide feedback,

champion new projects, define or approve/disapprove change control processes, and develop vendors.

Theres a tremendous amount of detail to this aspect of the discipline, and weve covered this in many

posts here.

Consistently Meet Goals- Operations must perform within statistically acceptable upper and lowercontrol bounds. Everything the vendor manager does should focus on meeting goals, from providing

forecasts to defining requirements, from ensuring vendors have adequate staff to ensuring the staff havecompleted all required training.

Strategies to Strengthen Vendor RelationsVendor management allows you to build a relationship with your suppliers and service providers that will

strengthen both businesses. Vendor management is not negotiating the lowest price possible. Vendormanagement is constantly working with your vendors to come to agreements that will mutually benefit both

companies.

1. Share Information and Priorities

The most important success factor of vendor management is to share information and priorities with your

vendors. That does not mean that you throw open the accounting books and give them user IDs and passwords

to your systems. Appropriate vendor management practices provide only the necessary information at the righttime that will allow a vendor to better service your needs. This may include limited forecast information, new

product launches, changes in design and expansion or relocation changes, just to name a few.

2. Balance Commitment and Competition

One of the goals in vendor management is to gain the commitment of your vendors to assist and support the

operations of your business. On-the-other-hand, the vendor is expecting a certain level of commitment from

you. This does not mean that you should blindly accept the prices they provide. Always get competitive bids.

3. Allow Key Vendors to Help You Strategize

If a vendor supplies a key part or service to your operation, invite that vendor to strategic meetings that involve

the product they work with. Remember, you brought in the vendor because they could make the product or

service better and/or cheaper than you could. They are the experts in that area and you can tap into that expertise

in order to give you a competitive advantage.

4. Build Partnerships for the Long Term

Vendor management seeks long term relationships over short term gains and marginal cost savings. Constantly

changing vendors in order to save a penny here or there will cost more money in the long run and will impact

quality. Other benefits of a long term relationship include trust, preferential treatment and access to insider or

expert knowledge.


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5. Seek to Understand Your Vendor's Business Too

Remember, your vendor is in business to make money too. If you are constantly leaning on them to cut costs,

either quality will suffer or they will go out of business. Part of vendor management is to contribute knowledgeor resources that may help the vendor better serve you. Asking questions of your vendors will help you

understand their side of the business and build a better relationship between the two of you.

6. Negotiate to a Win-Win Agreement

Good vendor management dictates that negotiations are completed in good faith. Look for negotiation points

that can help both sides accomplish their goals. A strong-arm negotiation tactic will only work for so long

before one party walks away from the deal.

7. Come Together on Value

Vendor management is more than getting the lowest price. Most often the lowest price also brings the lowest

quality. Vendor management will focus quality for the money that is paid. In other words: value! You should be

willing to pay more in order to receive better quality. If the vendor is serious about the quality they deliver, they

won't have a problem specifying the quality details in the contract.

8.Vendor Management Best PracticesWhether you're a multimillion dollar company or a small business with a few employees, here are some VendorManagement Best Practices that any size business can use.

ADVANTAGES TO MANUFACTURERS:

Lower inventory investments (raw and finished)

Better scheduling and planning Better market information Closer customer ties and preferred status
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ADVANTAGES TO RETAILERS: Fewer stock-out with higher inventory turnover

Better market information More optimal product mix Less inventory in channels (transfer costs) Lower administrative replenishment costs

VENDOR MANAGEMENT SUCCESS FACTORS:

Top management commitment

Focus on effort

Trust and partnership between supply chain stakeholders

Highly effective computer/information systems (EDI, Bar coding, Scanning) Competent manufacturers and the ability to forecast Willing stakeholders partners and patience

VENDOR RELATIONSHIP MANAGEMENT:

VRM or vendor relationship management is a category of business activity made possible by software tools that

provide customers with both independence from vendors and better means for engaging with vendors. These

same tools can also apply to individuals' relations with other institutions and organizations

VRM tools provide customers with the means to bear their share of the relationship burden with vendors andother organizations. They relieve CRM of the perceived need to "target," "capture," "acquire," "lock in,"

"direct," "own," "manage," and otherwise take the lead of relationships with customers. With VRM operating on

the customer's side, Customers are also involved as participants.

Selection of Vendors

1. The production capabilities of the vendor

(a) Capacity to manufacture the required product in desired quantities.

(b) Possibility of future expansion in capacity.

(c) The understanding or the knowledge of the vendor regarding the buying company and its need.

2. The financial soundness of the company

(a) The vendor companys capital structure.

(b) Whether it belongs to a larger group of companies; whether it is a Private Limited or a Public Limited

company.

(c) The profitability record of the company in the past.

(d) Expansion plans of the company in the future.


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3. Technical capabilities

(a) Whether the available machines are capable of the required quality of materials? What are the future plans

of the vendor?

(b) Whether there are enough technical skills available with the vendor?

(c) Whether there is proper research, design and development facility available with the vendor?

(d) What is the record of the vendor in filling the orders of other buying companies in the same business?

(e) What has been the consistency in the quality produced by the vendor?

(f) Whether the vendor has appropriate storage and warehouse facilities to retain the quality of the product

produced?

(g) Whether proper quality control procedures are being followed in the vendor company?

4. Other considerations

(a) What are the working conditions in the vendor company?

(b) How are the industrial relations in the vendor company?

(c) Whether there is any possibility of disruption of the supply of materials in terms of quantity and/or quality

due to human relations problem in the vendor company?

The Vendor Managed Inventory Approach

VMI reduces stock-outs and reduces inventory in the supply chain. Some features of VMI include:-

Shortening of the supply chain

Centralized forecasting

Frequent communication of inventory, stock-outs, and planned promotions. Electronic Data

Interchange (EDI) linkages facilitate this communication.

No manufacturer promotions

Trucks are filled in a prioritized order. For example, items that are expected to stock out have toppriority, then items that are furthest below targeted stock levels,

thenadvance shipments of promotional items (promotions allowed only in transition phase), and finally,

items that are least above targeted stock levels.

Relationship with downstream distribution channels


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Result: Inventory reduction and stock-out reduction

The Advantages of Managed Inventory

More Accurate Data

With vendor managed inventory, information is passed back and forth in a computerized format. That

automation can greatly reduce the number of keying errors and make the resulting inventory numbers

more accurate. In addition to better accuracy, the VMI system is also faster, resulting in more up to

date inventory numbers.

Better Service

Since both the vendor and the retailer have a vested interest, vendor managed inventory can improve

customer service and help all parties involved. The vendor works to ensure that the requested products

are in stock, the retailer supplies the products to the customers and the customers are satisfied. This

mutually beneficial arrangement is one of the main advantages of a vendor managed inventory system.

Partnership

With a vendor managed inventory system, there is a true partnership between the manufacturer and thedistributor. That partnership helps all parties work more efficiently. The fact that both parties are

working toward the same goal can also enhance customer service and employee morale.

Purchase Orders

Having a vendor managed inventory system in place also makes it easier to generate purchase orderson an as-needed basis. With VMI, purchase orders are generated on a predefined basis, making the

entire process more streamlined and efficient.

Decreased InventoryLevels

Vendor managed inventory lets the distributor and the manufacturer work more efficiently. Thisreduces the need for high levels of inventory at the distributor, which can reduce costs and boost

profits.

Easier Forecasting

With vendor managed inventory the manufacturer has access to the distributor's point of sale system.

That makes it easier for the manufacturer to forecast sales and determine the proper production

schedules.


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8. Appreciate vendors that manage the inventory well. Example: promotion to Category Captain, profit sharing

schemes, etc.

Strengths of Vendor Managed Inventory

Supply Chain level

Lower inventory levels at total supply chain level.

Less overhead

Increased sales.

Reduces human data entry errors.

Vendors

Better insight in customer demand (better resource usage, reduced raw and finished goods

inventories).

Improved, more direct communication with customers.

Improved market analysis.

Increased sales via lower out of stock rates.

Opportunity to provide category management and other value-added services.

Suppliers

Reduced replenishment times and lower inventory costs.

Increased sales through reduced stock outs.

Less redundancy.

Build strategic strengths through establishing strong supply chainrelationships.

Vendor assistance with category management.

End-users

Increased service level.

Reduced stock outs


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Assumptions of Vendor Managed Inventory

Vendor Managed Inventory is usually successful for industries and organizations with the following

characteristics:

Multiple outlets, because this increases the benefits compared to traditional inventory management.

Severe consequences in case of human errors (Pharmaceutical).

Industries with steady and high volumes (Retail, Consumer Products).

Industries with high-value inventory and a high level of demand unpredictability (High Tech).

Management with strong leadership capability to form strategic long term partnerships (Automotive).

Vendor Managed Inventory Implementation Challenges

Vendor Managed Inventory can be made to work, but the problem is not just one of logistics. VMI often

encounters resistance from the sales force and distributors. At issue are roles and skills, trust, and power shifts.

Some of the sales force concerns are:

Loss of control

Effect on compensation incentive bonuses may depend on how much is sold, but sales force has less

influence under VMI.

Possible loss of job

Scepticism that it will function welltechnical problems

Concern that reduced inventory will result in less shelf space and therefore loss of market share. This concern

can be addressed by filling the shelf space with other stock keeping units from the same vendor.

Goals of VMI:

The goal of Vendor Managed Inventory is to provide a mutually beneficial relationship where both sides will be

able to more smoothly and accurately control the availability and flow of goods. The following topics are

covered:

Customer Benefits

When the supplier can see that its customer is about to exhaust its inventory, the supplier can better

prepare to replenish the customer because the supplier can then better schedule its own

production/distribution. Customers will reduce/eliminate stockouts because they will not have to

reorder goods at the last minute without knowing whether the supplier has the ability to restock without

interrupting the customers operations. Therefore, part of VMIs goal is to reduce uncertainty thatarises when the supplier is blind to the customers inventory status.


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Supplier Benefits

As long as the supplier carries out its task of maintaining predetermined inventory and avoiding stock

outs, it will be able to lock in a VMI-supported customer for the long term with or without a contract.

This will produce a steady and predictable flow of income for the supplier and reduce the risk that the

customer will switch suppliers (Switching would be too costly for the customer). A VMI arrangement

will allow the supplier to schedule its operations more productively because it is now monitoring itscustomers inventory on a regular basis. Furthermore, reductions in inventory will be achieved once thesupplier develops a better understanding of how the customer uses its goods over the course of a year.

Common Mistakes

Unexpected demand changes by the customer need to be shared with the supplier. Changes in demand

could result from the customer acquiring a new, large customer opening of a great deal of stores in a

short period; or offering special promotions that create spikes in demand. The supplier may be unable

to schedule production or shipment in a timely manner, causing a drop in inventory available for the

customer to sell in the event of a foreseen increase in demand. A spike in demand could also create a

burden on the supplier, who will have to reprioritize its production plan or inventory from one

customer to another. Likewise, if the supplier is experiencing a significant spike in demand from amajor customer, it may be wise to let the VMI customer, and other customers as well, know that the

supplier will have very little flexibility over a certain period of time, so that everyone can adjust

accordingly.

The most common cause of VMI failure revolves around communication breakdowns. All of theseproblems in implementing a VMI program can be significantly diminished if they are adequately

addressed at the beginning of discussions. Hence, there should be several in-depth meetings upfront to

avoid problems down the road.

Development

VMI is a stepping-stone toward an emerging process, Jointly Managed Inventory. In Jointly Managed

Inventory a partnership between the supplier and customer is formed. This solidifies the

current VMI relationship.

Jointly Managed Inventory (JMI) is a much more detailed extension of VMI but the goals and premise are

quite similar. It takes the foundation from which the relationship has already been built and fine-tunes it.

This partnership involves increased tactical planning between the supplier and customer whendeveloping JMI. This should include, but is not limited to, the customer integrating the supplier into the

customers point-of-sales (POS) system, for example.

This integration allows the supplier to gain insight into real-time sales data to further improve the

replenishing function while being able to better plan its own production/distribution system to meet thecustomers needs. Proceeding to this step will further solidify the relationship and produce a favourable

outcome for each party

Three Steps in Making (VMI) Work

How to Make VMI Work?

Clarify expectations. There needs to be thorough discussion about how the system will benefit bothorganizations in the long term or one of the parties, particularly the supplier, is prone to disappointment

with some of the short-term results. If these items are not addressed the program will likely be


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terminated quickly with neither side gaining any of the benefits expected from the program. The

objective is clear and constant communication between the supplier and customer. When the two

parties work in conjunction they can be assured that the planning function, for both sides, will begin tosmooth over time.

Agree on how to share information. If the supplier and customer can agree to share information vital to

restocking in a timely manner, then the odds of a synchronized system will dramatically improve.Proprietary information would not have to be shared between the supplier and customer, but enough

information to maintain a steady flow of goods is necessary. The customer should be willing to shareproduction schedules and/or forecasts to provide some visibility for the supplier.

Keep communication channels open. When the two parties set out to implement a VMI program, they

need to meet and discuss their goals and how they need to proceed in order to realize those goals. Once

a VMI program has been activated, each side needs to understand that there are going to be some

miscues. These miscues need to be studied as opportunities for learning and then used to avoid

repetitive problems in the future.

Six Steps to a Successful VMI System

1. COMMUNICATE expectations of all parties. Customers and suppliers must make the effort to sit

down and discuss the goals and objectives of implementing VMI. The importance of this step cannot be

overstated. Both parties hardware and software requirements must be identified, and an understanding

must be reached in terms of how both companies systems will communicate. Then a plan for

implementation must be mapped, specifically identifying each partys financial and other

responsibilities.

2. Customer must commit to sharing PRECISE information. Suppliers must have visibility into the

customers internal sales and inventory information. Without accurate data, ability to quickly meet

demand will be impaired.

3. Suppliers must ensure RELIABLE transmission, receipt, and use of information. To facilitate step 2,

the supplier must be able to guarantee that the customers trusted information will be communicated,

received, and utilized securely and thoroughly to meet the designated needs. Time should be spent

during the planning phase discussing information precision and reliability.

4. Sufficiently TEST systems before going live. As with any new system, testing will uncover any bugs or

inefficiencies and can help to avoid future headaches.

5. Expect implementation to be a PROCESS not a project. Remember that there is no on/off switch.

Adjustments will have to be made as demand levels fluctuate, and no system will be perfect 100% of

the time.

6. Plan to spend sufficient TIME AND MONEY to make it work. Most successful VMI systems weve

read about took 2-2.5 years to put into operation, and cost hundreds of thousands of dollars for IT and

training. Spending (or finding) the time to create a comprehensive system can be a challenge.
http://scm.ncsu.edu/public/lessons/less021023.htmlhttp://scm.ncsu.edu/public/lessons/less021023.html


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Four Stages of the Fully Automated VMI Model

1. Collaboration

In business environments where thousands (or 10s / 100s of thousands of) SKUs have to be managed daily,

collaboration at the tactical (item) level is impractical, costly and error prone. The more effective collaborativeprocess is at the strategic level, where overall service and inventory investment goals are agreed upon, along

with he constraints within each company. The collaborative stage is critical in establishing the goals and key

performance indicators for the VMI relationship. Periodically, this stage is revisited to review current

performance and adjust or reconfirm the goals and constraints. The impact of this strategic collaboration is acommonality of metrics and focus between supply chain partners.

2. Planning

The key to automating a replenishment process, and achieving world-class inventory /service performance is

employing comprehensive, dynamic, exceptions based replenishment software. Software tools that iscomprehensive enough to effectively manage a variety of demand patterns. Dynamic enough to automatically

detect and adjust to changing demand patterns, goals and constraints. Exceptions based to allow for an

automated flow of information and product when the outcomes are within expectation. If exceptions aredetected, they are analyzed for degree of importance and the user is automatically prompted for action.

3. Execution

In dynamic, volume intensive supply chains inventory conditions can change suddenly. One day inventory

levels are adequate, the next day the inventory may be depleted (due to increasing sales!) or critically low,

creating the likelihood for a service interruption. Each day the current supply chain positions (inventory, booked

orders, special commitments, in-transit and future requirements) are analyzed against the plans to automatically

determine the course of action. When the Collaboration and Planning stages are done properly, the Execution

stage becomes automated with very few exceptions, requiring scant human interaction on a daily basis.

Furthermore, the Execution stage can provide suppliers with valuable information beyond a purchase orderquantity, enabling improvements to the order fulfillment and inventory allocation processes.

4. Assessment

The old adage holds true in VMI, what gets measured gets fixed. Set the goals, determine the plan, execute

against the plan, then measure how you did. The Assessment stage tells the VMI partners how they are doing

against the goals. And within the software, diagnostic information is fed back into the planning stage in a

continuous effort to close the gap between theory (plan) and reality (result). In many instances a VMI

relationship is the first time supply chain partners both have access to, and are measuring performance using the

same metrics. When two companies are focused on the same goals and have access to the same key performance

metrics, a true supply chain partnership emerges, resulting in a better performing supply chain.


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Supply Chain Impact

Inventory is the proxy for information. In the absence of timely and accurate consumption data, each node in the

supply chain compensates for the lack of information with inventory. Not only does poor information flow build

supply chain inventories, but it also restricts each companys ability to react to increases in demand, causes

extended outages, service interruptions and lost sales. As actual demand for products is disseminated up the

supply chain in a more real time environment, the more closely aligned production is with demand. As the gap

between production and demand diminishes, so to does supply chain inventories and service level interruptions.

The ultimate goal is supply chain excellence, as defined by service, speed and cost. Delivering the best service

at the point of consumption in the least amount of time at the lowest total cost. The result is a supply chain that

has an automated, timely flow of information triggering replenishment activities that anticipate demand

accurately.

For the replenished location, the major benefits are: Increased Service Level To The End Customer

Increased Sales

Increased Return On Assets

Elimination Of Routine Replenishment Activities

Reduced Fulfillment Costs / Lead Time

Improved / Expanded Relationship With Supplying Organization

For the supplier, the major benefits are:

Increased Service Level To The End Customer

Increased Sales Through To The End Customer

Reduced Fulfillment Costs / Lead Times

Improved / Expanded Relationship With Replenished Organization Smoother Demand Patterns

Elimination Of Human Errors

Keys to Success

VMI delivers tangible results throughout the supply chain. As the concepts and practices of lean extend

beyond the manufacturing floor down through the supply chain, VMI is the enabling process to drive out costs

and time. To ensure you realize the full impact of the VMI experience, follow these keys to success:

1. Set, review and maintain performance goals

2. Manage all SKUs through VMI to minimize supply chain transactions 3. Spend the time and effort up front to ensure data accuracy


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4. Utilize local market intelligence to augment the automated replenishment decisions

5. Conduct periodic performance reviews

6. Use the metrics to find cost and inefficiencies, then work together to eliminate.


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Report Vendor Management

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