Koç University
OPSM 305 Supply Chain Management
Class 20:
Vendor Managed Inventory
Zeynep Aksin
zaksin@ku.edu.tr
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The Bullwhip Effect:
Managerial Insights
 Exists, in part, due to the retailer’s need to estimate the
mean and variance of demand.
 The increase in variability is an increasing function of the
lead time.
 The more complicated the demand models and the
forecasting techniques, the greater the increase.
 Centralized demand information can reduce the bullwhip
effect, but will not eliminate it.
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Coping with the Bullwhip Effect
in Leading Companies
 Reduce Variability and Uncertainty
- POS
- Sharing Information
- Year-round low pricing
 Reduce Lead Times
- EDI
- Cross Docking
 Alliance Arrangements
– Vendor managed inventory
– On-site vendor representatives
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Barilla SpA
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Barilla SpA Part A
 Barilla SpA is the world’s largest pasta manufacturer
 The company sells to a wide range of Italian retailers,
primarily through third party distributors
 During the late 1980s, Barilla suffered increasing
operational inefficiencies and cost penalties that resulted
from large week-to-week variations in its distributors’
order patterns
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Distribution
Factories
25
%35
%65
800 SKU
CDC
2
%10
Depots
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Order delivery 24-48 hrs
%90
GD
150 SKU
DO
14 days stock
Zincir Mağazalar
45% of dry products
12 days stock
Bağımsız marketler
Signora
Maria (Bakkal)
%20
%35
10 days stock
14 days stock
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Fresh
Ordering Process
Depots
Dry
CDC
Warehouse
8-10 days
Distributors
Warehouse
GD
Daily
Orders
OD
24-48
hours
Signora
Maria
(Bakkal)
Chains
Independent
Markets
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What is driving this order pattern?
Exhibit 12 Weekly Demand for Barilla Dry Products from Cortese’s Northeast Distribution Center to the
Pedrignano CDC, 1989.
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Causes for Demand Fluctuations
 Transportation discounts
 Volume discount
 Promotional activity
 No minimum or maximum order quantities
 Product proliferation
 Long order lead times
 Poor customer service rates
 Poor communication
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How does Barilla compare to the
beergame?
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What is the impact of fluctuations?
 Because of high product changeover: either
inefficient production or excess finished goods
inventory,
 Inventory costs: finished goods yet also
stockouts due to unexpected peaks in certain
SKUs
 Utilization of central distribution low, yet need to
be prepared for fluctuations
 Transportation costs high due to variability in
demand for trucking
 Excess capacity at distributor due to need to 12
store items bought during promotions
Impact of Bullwhip in general
 High inventory/lost sales/backlog cost
 Low customer satisfaction
 Low operational efficiency
- underutilization
- overtime
- expediting
 Unnecessary capacity investment
 Swings in working capital
 Blaming others; frustration, helplessness
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JITD
 To address this problem, the director of logistics
suggests the implementation of Just-in-Time
Distribution (JITD), with Barilla’s distributors.
 Under the proposed JITD system, decision-making
authority for determining shipments from Barilla to a
distributor would transfer from the distributor to Barilla.
 Specifically, rather than simply filling orders specified
by the distributor, Barilla would monitor the flow of its
product through the distributor’s warehouse, and then
decide what to ship to the distributor and when to ship
it.
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Basic premise of JITD
 Replace Sequential optimization with Global optimization
– Who will optimize?
 Eliminate some of the ‘false’ economics that drive
traditional ordering processes
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Strategic Partnering
Types of SP:
 Quick Response: Vendors receive POS data from
retailers, and use this information to synchronize
production and inventory activities at the supplier. In
this strategy, the retailer still prepares individual
orders, but the POS data is used by the supplier to
improve forecasting and scheduling.
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Strategic Partnering
 Continuous Replenishment: Vendors receive POS
data and use it to prepare shipments at previously
agreed upon intervals to maintain agreed to levels of
inventory.
– Wal-Mart
 Advanced Continuous Replenishment: Suppliers
may gradually decrease inventory levels at the
retailer’s store or distribution center as long as
service levels are met. Inventory levels are thus
continuously improved in a structured way.
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Strategic Partnering
 Vendor Managed Inventory (VMI):JITD
– VMI Projects at Dillard Department Stores, J.C.
Penney, and Wal-Mart have shown sales
increases of 20 to 25 percent, and 30 percent
inventory turnover improvements.
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Requirements for Effective SP
 Advanced information systems
 Top management commitment
 Mutual trust
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Main Characteristics of SP
Criteria
Decision
Inventory
Types
Maker
Ownership
Quick
Retailer
Retailer
Response
Continuous
Contractually Agreed
Either
Replenishment
to Levels
Party
Advanced
Contractually agreed
Either
Continuous
to & Continuously
Party
Replenishment
Improved Levels
VMI
Vendor
Either
Party
New Skills
Employed by vendors
Forecasting Skills
Forecasting &
Inventory Control
Forecasting &
Inventory Control
Retail
Management
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