October 13, 2010

MDM Interview: Common Pitfalls with VMI

By Jenel Stelton-Holtmeier

Interview reprinted with permission from Modern Distribution Management (MDM). Read more MDM articles and subscribe at www.mdm.com.  

The weak economy has led to more companies looking for new ways to improve their bottom lines. Vendor Managed Inventory has been growing in popularity, but according to Thomas A. Kozak, president of Pan-Pro LLC, it is also easy to do wrong. Kozak spoke with MDM about how to avoid the common pitfalls.

Kozak recently presented “10 Ways to Not Benefit from VMI Programs” at the 2010 IDEA E-Biz Forum, sharing lessons from his 36 years in supply channel optimization.

MDM: How do you explain VMI in practical, concrete terms?

Thomas A. Kozak: VMI is defined as everything from putting a supplier’s employee in place at a customer to write orders to moving ERP calculations from the distributor to the supplier or an outsourced cloud, all the way to advanced Supply Channel Optimization (SCO).

In my presentation at IDEA, I defined VMI with a beautifully crafted message where every word has significant meaning, and it tells Pan-Pro’s approach to Supply Channel Optimization.

But in practical, concrete terms, VMI is eliminating work, not automating it. And VMI is giving our teams the tools to do their functions better, not just to do what they have been doing faster. Those that let go of how we did things and instead focus on how we can do things now and how we can do things in the future, they can add great value for their company and their supply chain partners.

MDM: What do you think is the biggest or most common mistake companies make when implementing VMI programs?

Kozak: There was an author who really radically changed my thinking of business and IT with his wonderful characterization of the biggest mistake. It was 1990, and Dr. Michael Hammer wrote in the Harvard Business Review: “It is time to stop paving the cow paths.”

In other words, don’t take the approach of automating what we’ve been doing because it’s what we’ve been doing, but rather think about what we could or should be doing and automate them.

MDM: How difficult is it to get the companies you work with, particularly their executives, to understand that it’s about new processes, not necessarily keeping to old processes?

Kozak: Our experience is quite varied in that area. I think it’s up to the leadership of the distributor and the manufacturer. If we’re going to change direction, if we’re going to stop paving the cow path, they’re going to have to set the tone. They’re going to have to lead the way. It’s not that hard.

MDM: Where should the leadership come from for these initiatives?

Kozak: Leadership comes from and at many levels, but it starts with solid support from the top. I have found that when the top executives from both companies work together to set clear fact-based expectations for success and communicate those expectations to their entire team, warehouse to executives, that’s when success happens. If the team isn’t ready, it’s the executives who can provide the impetus to get ready.

Sometimes people have comfort zones and what we’re doing with Supply Channel Optimization is outside of some people’s comfort zones. Others embrace it fully and run with it. When people come to us, they often have a very clear understanding of what their objective is.

When there’s a challenge, it’s usually cultural, not technical. Our teams can get so used to doing things the way they have always been done, sometimes there’s just resistance to doing something a new way.

MDM: At the E-Biz Forum, you mentioned that several companies approach VMI or SCO from an IT perspective. Could you expand a little bit on how businesses treat VMI as a technical endeavor? How should companies approach it?

Kozak: If you’re going to turn on and benefit from a more advanced Supply Channel Optimization program, it’s going to require a little bit of work from IT. That IT effort is required at the start of the process and the relationship; we have to get that data flowing between the two companies. But a successful program requires a lot more than just managing that data flow.

Focusing on just the IT element can delay progress on implementation. IT is perennially busy, and IT can be inclined to conceptualize everything as a “project,” something that is defined and then completed, and then it’s done.

Supply Channel Optimization is a tool for an ongoing relationship where two supply chain partners are working together at many levels, commercially and technically, to beat the competition. So the IT part tends to be very frontloaded, and then it’s a commercial program. It’s ongoing collaboration at many levels, not a “project.”

MDM: What ongoing role does IT have?

Kozak: It’s an important role, but it’s not a continuous role. IT’s role in this initial project is to get the data flowing between the two companies, and that will keep happening if nothing changes – that’s a big “if.”

What if the company’s ERP provider has a new release, or the business closes a warehouse and changes its logistics strategy? When those kinds of changes happen, if we’ve got a successful SCO program together, it’s imperative the data flow doesn’t break with those changes. As we slice the data more and more thinly, it’s even more important that we have correct and reliable data. That’s IT’s role.

MDM: What sort of metrics should be used to measure the effectiveness of a VMI program?

Kozak: We should use the metrics that are applicable to managing our inventory assets to meet our macro business goals.

We should address another idea before we go on with the metrics, however: What’s the difference between item management and asset management? I used these two terms in my presentation at IDEA, and they are important to evaluating the SCO process.

Item management is when the team members are focused on micro level components of individual parts of a product line. At this level we see people reviewing individual item’s order points, days’ supply, three-month moving averages and the like on reports or queries of the system, and on reviewing and changing generated orders.

Asset management is when the entire team is focused on how a product line is performing as a whole. Here we see questions like “What is the trend on the Key Performance Indicators for the line?” “Is my end customer service level where I want it to be so my business beats the competition?” “Is my dead inventory being managed to the level needed for financial performance?”

And if the KPI results are not in line with the overall business goals, then the business and the relationship is changed as needed. We don’t go back to looking at the order point of an individual item.

For inventory optimization and asset management, the calculations are complex and the items interdependent. If we focus on individual items and overriding individual settings, we miss that chance to get more performance out of that asset.

That said, a focus on asset management also frees time for team members to gather and provide market intelligence, knowledge about the future of the business that is not consistent with the past. Replenishment is like trying to drive down the highway while you’re looking in the rearview mirror.

When the team members are not focused on this item management level, they can have time to learn and communicate to the system this big picture, the “here’s what you don’t know from the history.”

MDM: Can you provide some specific examples of metrics that can be used?

Kozak: In the most successful SCO programs, the focus is on one of two metrics; how is the supply chain doing together to service end customer demand or the focus is on is our inventory asset investment where we want it in relation to sales. The shorthand for that is Fill or Turns.

Supply Chain Optimization, unlike VMI, is focused on achieving the goal – Fill or Turns – while providing the best possible performance for the secondary metric. So for example, we may have a distributor that feels their path to greater profitability and market dominance is to provide better service than their competitor down the street.

Many distributors choose to differentiate by providing higher fill to that end customer, by having the product that the end customer wants when the customer shows up to buy it. But you don’t want to just have the product, you want to do it at a level of investment that makes your business make sense. That’s where SCO comes in.

If a supply chain is not achieving the primary goal, there are many supporting metrics, still at the asset management level, that can guide us together to determining what business changes are needed to achieve the goal. And often, those changes can be pretty simple.

Source: Modern Distribution Management ©2010 Gale Media, Inc. All rights reserved.