Stories
Stories
In VMI Partnerships, the Devil is in the Data
The expression “letting the fox guard the henhouse” comes to mind when you first hear about Vendor Managed Inventory (VMI) systems, where a product manufacturer actually places orders for the retailer, determining quantities based upon consumption data provided by the store chain.
In the past decade, however, influential manufacturers such as Procter & Gamble and Campbell Soup initiated such partnerships to help smooth production cycles and improve profits. Retailers were wooed by the potential efficiencies of better inventory management and, in some cases, lower wholesale prices.
The win-win scenario carries a caveat, though, according to research by HBS assistant professor Susan Kulp. Her work suggests that the profit gains of VMI depend on both the retailer's willingness to provide detailed demand information and the manufacturer's ability to process such transmissions accurately.
In other words, if a retailer only gives the manufacturer warehouse stock information rather than actual sales data, or if the data is sent by fax instead of electronic transfer (which can be more efficiently verified), VMI may not pay off. To the degree the system operates without superior information, it lacks advantages over the traditional model where the retailer just places orders.
“When I started my research, there was a belief that these systems were unambiguously beneficial,” says Kulp, whose research on the topic is forthcoming in the Accounting Review. “I set out to analyze the conditions under which such systems were or were not beneficial to the manufacturer.” Interviewing leading VMI-experienced manufacturers and retailers, Kulp identified information transfer as a potential trouble spot. Her insights were supported by survey responses from 53 divisions of food and consumer packaged-goods companies indicating that VMI is more prevalent where retailers deliver detailed demand data via highly reliable transfer methods.
In short, manufacturers should think twice about implementing VMI if retailers are supplying only limited information or if information-processing capabilities aren't top-notch. Says Kulp: “We want to make sure people who are entering these contracts know what type of information environment they need.”