Merits of Vendor Managed Inventory - Essay Example

Merits of Vendor Managed Inventory Introduction Green Chilly (GC) is a chain of restaurants that operates in the United Kingdom. The business operates a number of restaurants that offer takeaway meals. The business approach used by the restaurant focuses on the sourcing of healthy foods from local producers and suppliers. As the company evolved, it had to source for products from a central procurement organization that is based in West Midlands U.K. After sourcing from this suppler, the firm distributes to its 53 outlets. The firm serves close to 16,000 sit down customers, in addition to 23,000 customers who purchase take away snacks and drinks. Green Chilly faces a number of problems particularly in the stocking of items and staffing. These problems are usually caused by the country’s holiday season and the weather conditions. The two factors play a crucial role in the determination of customer preferences. The problems affecting the operations of Green Chilly can be addressed using a number of techniques. It is vital to consider the merits, demerits and risks of the techniques with respect to the problems facing Green Chilly. The four techniques that will be applied to the problems are vendor managed inventory, ABC analysis, supply scheduling and e-procurement. ABC Analysis Activity based costing or ABC analysis is a supply chain method that allocates direct expenses and overhead to the essential activities of a business. The analysis enables businesses, managers and owners to define their areas of sales or manufacturing that can generate maximum profits. Inventories in Class A account for 80 percent of the revenue while inventories in Class B and C account for 15 and 5 percent of the revenues respectively. ABC analysis is a vital business tools that is effectively employed in the management of materials. Class A items are tightly controlled and managed using accurate records, while Class B items are less tightly controlled. However, they are managed using good records. Class C items are easy to control and manage using minimal records (Gudehus & Kotzab, 2012, p. 69). The approach provides a mechanism for the identification of items that have significant impacts on the overall inventory cost. It accomplishes this function while providing mechanisms for the identification of different groups of stock that need different controls and management. Merits of ABC Analysis With respect To GC’s Recent Issues The approach provides improved controls of high priority inventory. In this case, Class A items have high annual consumption values. ABC analysis is essential in the reduction of inventory stock. Managers can easily manage Class A items because of the limited amount of this category. In this case, Green Chilly faces a problem with the quality issues of some of the fresh products supplied (Nankervis, 2005, p. 121). The firm must create a fast market for these products and ensure that they have high quality. Using ABC analysis, managers can reduce these quality issues through the prioritization of the control of the Class A items. ABC analysis confers abilities for improved or efficient cycle counts. In this case, cycle counts refer to the process of counting specified items on scheduled dates. Using ABC analysis, it is easy to allocate resources efficiently during these cycle counts. The frequency of a cycle count and the chosen items depends on the fluctuation of the inventory (Nankervis, 2005, p. 151). The organization of an inventory according to classes enables managers to focus on regular cycle counts. As a result, the business saves labor and time required in each cycle of a class. Risks of ABC Analysis With respect To GC’s Recent Issues GC risks conflicts with the other cost systems in place. It is vital to note that the ABC analysis fails to meet the Generally Accepted Accounting Principles (GAAP). It also clashes with traditional costing systems. Businesses that apply the ABC analysis method have to operate two costing systems. One of the systems is used for internal purposes and the other for compliance with GAAP requirements. Businesses use traditional costing systems because they produce figures that are required by GAAP (Wengler, 2006, p. 41). They also assign cost drivers through the actual unit cost, instead of the activity percentage allocated to the cost driver. Therefore, ABC cost allocations differs from the allocations of traditional cost systems. GC risks a situation where it will need additional resources for maintenance, compared to traditional costing systems. During cycle counts, Class A inventories have to be routinely analyzed in order to determine whether the inventory still has high priority items. In case the inventory piece is not needed anymore, it is transferred to a different inventory classification (Wengler, 2006, p. 69). Extensive data collection and measurements are required for this constant process. Example of How to Use An example of how to use this approach is the actual distribution of the classes in a car manufacturing firm that has 4,051 active parts. The total number of items used by this firm is 14,213. ABC Class Number of Items Total amount required A 10% 70% B 20% 20% C 70% 10% Total 100% 100% This distribution is used to change the total number of the 14,213 parts (Nankervis, 2005, p. 202). In the case of uniform purchase, this distribution is used in the equal purchase policy. For instance, each weekly re-order and delivery point will mean that the firm has 16,000 deliveries within a period of 4 weeks. Additionally, the inventory will be 2.5 per weekly supply (Nankervis, 2005, p. 202). This is possible assuming that the restaurant does not have a large size constraint. Application of weighted purchasing conditions Uniform Condition Weighted Condition Items Condition Items Conditions All items 14,213 Re-order point=2 week supply Delivery frequency=weekly A class items 200 Re-order point=1 week supply Delivery frequency=weekly Class B items 400 Re-order= 2 weekly supply Delivery frequency=twice per week Class C items 3,400 Re-order=3 week supply Delivery frequency=4 weeks (Nankervis, 2005, p. 205) The weighed purchase policy is applied to the ABC class leading to a 1.925 week supply. This is achieved as follows, Class C monthly delivery is 4, with a re-order position of 3 week supply, and Class B has a bi-weekly delivery with a re-order point of 2 weeks supply. Class A has a weekly delivery that has a re-order point of 1 week supply. The total number of delivery within a period of 4 weeks is (A 200X4=800) + (C 3,400X1=3,400) + (B 400X2=800) =5,000. The average monthly inventory will be (B 15%X3weeks) + (A 75%X1.5 weeks) + (C 10%X3.5 weeks) = 1.925 week supply. Using the weighed control of the ABC classification, the required inventory levels and man-hours are significantly reduced (Nankervis, 2005, p. 211). Supply Scheduling Supply scheduling is the formulation of a supply schedule, which is a table that shows the amount of items a firm is willing to supply at a given price. This is based on the existing conditions. Essential factors that affect supply scheduling are the price of the goods, production costs, price of related items, the expectations of sellers and technology. Combinations of operational issues that influence the supply chain are organized with an aim of achieving jut-in-time objectives. The organization of these issues is dependent on supply scheduling (Herrmann, 2010, p. 85). Decision makers at the operational level need to consider factors such as production deadlines, due dates, changeover times and costs. Each stage of supply scheduling defines its ideal schedule through the specification of how orders need to be processes. Merits of Supply Scheduling With respect To GC’s Recent Issues Supply scheduling has the potential to help the restaurant meet its demand. Customer demand is characterized by troughs and peaks. Such a profile results to planning inefficiencies and problems. An important merit of supply scheduling is that it decouples customer demand from what is supplied (Selvarajah & Steiner, 2006, p. 91). GC can tune the batch size in order to optimize the supply process. This merit is important in addressing the shortage of promotion meals. Supply scheduling helps in supporting future deliveries and lead time. The problems that GC faces are caused by lead time. Lead time creates panic among the employees of the restaurant because they do not have the supplies that can meet the demands of the customers. Supply scheduling is helpful in supporting future deliveries because it does not rely on customer demand, but on the operational requirements of the business (Selvarajah & Steiner, 2006, p. 91). This will enable GC protect its lead time, in addition to planning for future customer requirements. Risk of Supply Scheduling With respect To GC’s Recent Issues Supply scheduling has the potential to cause supply chain disruptions, which may reduce the revenues of GC. These disruptions can also reduce GC’s market share, inflate costs and threaten distribution. In this case, supply scheduling may stretch GC’s supply chain. GC may experience supply disruptions, which may cause reduced stock returns (Sawik, 2013, p. 67). Example of How to Use For instance, an assembly company that has to outsource jobs to different firms may wish to process materials using the same series as the due dates. Based on the concept of supply scheduling, scheduling decisions at the upstream stage have to conform to the actual time when the supplier dispatches the raw materials. The most crucial element of a successful JIT system is the punctual delivery of supplies during the different stages of production (Olson, 2012, p. 1). Vendor Managed Inventory Vendor managed inventory refers to a process where vendors create orders based on the demand information received from customers. In this case, customers and vendors are bound by agreements, which determine the fill rates, inventory levels and fill costs (Franke, 2010, p. 69). The agreement between the vendor and customer improves the performance of the supply chain. In addition, it reduces the inventory levels and eliminates stock out situations. Merits of Vendor Managed Inventory With respect To GC’s Recent Issues The main benefit of vendor managed inventory is the responsibility of the vendor in supplying customers when items are needed. Therefore, there is no need for GC to have significant safety stocks because its suppliers will have a responsibility of supplying the restaurant in a timely manner (Salzarulo, 2006, p. 26). Reduced inventories for customers have significant cost savings. Additionally, GC benefits through reduced purchasing costs. In this case, the vendor receives data instead of the purchase orders. This means that the purchasing department at GC does not have to spend a lot of time producing and calculating orders. Additionally, the need for purchase order reconciliation and correction is removed (Salzarulo, 2006, p. 35). This significantly reduces the purchasing costs. This merit addresses the lack of a structured procurement process. Risks of Vendor Managed Inventory With respect To GC’s Recent Issues The implementation of vendor managed inventory may not lead to the realization of expectations. Vendor managed inventories may cause material shortages even with the formulation of agreements between vendors and customers (Schorr, 2008, p. 168). Additionally, the expediting of materials may increase and the inventory levels increase downstream. Using vendor managed inventories causes a situation where forecast inaccuracies may hinder effectiveness. Example of How to Use Vendor managed inventories require the vendor to specify delivery quantities. These quantities are sent to customers using the distribution channel, which is based on an electronic data interchange. Different EDI transactions form the basis for vendor managed inventory. The first transaction is the product activity records. This transaction contains the inventory and sales information. It contains information such as the quantity sold, quantity on hand, quantity on order, quantity received and forecast quantity. The EDI is sent on a weekly basis from a customer to a vendor (GüNther & Meyr, 2009, p. 33). The vendor’s order decision is based on the information or data on the product activity record. E-Procurement E-procurement refers to business activities such as the sale and purchase of services and work through online platforms. The value chain of e-procurement comprises e-tendering, incident management, e-auctioning, catalogue management, vendor management and contract management (Neef, 2009, p. 27). It is vital to note that the elements of e-procurement include the request for proposals, request for information and request for quotations. Merits of E-Procurement With respect To GC’s Recent Issues E-procurement streamlines procurement and transaction processes, leading to a reduction in the transaction time. In this case, buyers have the tools to search catalogs containing services and goods from different suppliers. These tools enable them to compare prices and products on-line. E-procurement enables real time communication, which allows buyers to check current quantities, qualities and prices (United Nations, Asian Development Bank, & Korea (South), 2006, p. 39). E-procurement will help the firm address the issues of information sharing and communication. E-procurement allows the standardization of procurement processes. The electronic catalogues found in e-procurement standardize the procurement process because they list all items on offer. The listing enables the procurement officers to compare items. Regardless of their location, buyers can easily access catalogs (Neef, 2009, p. 57). E-procurement confers greater access to suppliers. The virtual e-procurement portals increase access to suppliers throughout the world. This translates to a wider range of services and goods. Increased access to suppliers also confers global operability (Neef, 2009, p. 61). The online platforms support different languages and international financing options. Risks of E-Procurement Inventory With respect To GC’s Recent Issues GC will experience increased costs during the implementation of e-procurement because of the need to train its employees on how to use the platform. Additionally, there is a high risk of data compromise. The firm may lose crucial financial data to third parties (Pani & Agrahari, 2007, p. 111). There is also a risk of multiple standards. GC and its suppliers face uncertainty over the e-procurement service provider. Multiple standards lead to confusions particularly in the selection of the service provider. E-procurement may increase the costs for GC as it seeks to fulfill multiple standards (Pani & Agrahari, 2007, p. 115). How to Use E-Procurement E-procurement is used to confer competitive advantages to a firm because it reduces costs, reduces lead time and increases efficiency. Internet based procurement practices and activities link supply chain managers with their customers and other businesses. In order to implement e-procurement, the firm is required to have an internet based business transaction system (Ordóñez De Pablos, 2013, p. 31). Conclusion GC is facing a number of problems particularly with the overstocking of items and staffing. A number of techniques can be used to solve some of the problems facing GC. However, it is vital to note that these techniques have some risks. ABC analysis is effective in solving the issues of quality. Supply scheduling is useful in addressing the shortage of promotion meals. Vendor managed inventories can be applied in resolving the issues of increased prices for raw materials. E-procurement can be used to solve communication issues, lack of structured procurement processes and the need to outsource functions to other firms. Bibliography Franke, P. D. (2010). Vendor-Managed Inventory For High Value Parts: Results From A Survey Among Leading International Manufacturing Firms. Berlin, Univ.-Verl. der TU. Gudehus, T., & Kotzab, H. (2012). Comprehensive logistics. Heidelberg, Springer-Verlag Berlin Heidelberg. http://dx.doi.org/10.1007/978-3-642-24367-7. GüNther, H. O., & Meyr, H. (2009). Supply Chain planning quantitative decision support and advanced planning solutions. Berlin, Springer-Verlag. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=428935. Herrmann, J. (2010). Supply Chain Scheduling. Wiesbaden, Gabler. Nankervis, A. R. (2005). Managing Services. Cambridge [U.A.], Cambridge Univ. Press. Neef, D. (2009). E-Procurement: From Strategy To Implementation. Upper Saddle River, Nj, Financial Times/Prentice Hall. Olson, D. L. (2012). 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