Design and integration aspects of Vendor Managed Inventory systems

Abstract: This study looks into a concept of Supply Chain Management that has received a lot of interest in both industry and academia, Vendor Managed Inventory, a concept that changes the traditional order-to-delivery process from having a customer placing orders to a supplier, to instead having the supplier be responsible for placing orders and keeping customer inventory levels within agreed limits. Most previous VMI research has been focusing on retail and grocery supply chains, and has been devoted to comparing the traditional order-todelivery process with the VMI process. A customer’s perspective has also dominated previous research, and hence this thesis has focused on industrial supply chain relationships. In particular, the focus has been on the supplier’s possibility to really utilise VMI. The objective of this study is to identify, analyse and develop models to better obtain the possibilities to render more effective production planning and logistics through the integration of systems, information flow and processes when using the concept Vendor Managed Inventory in an industrial setting. The objective is also to evaluate what such integration would lead to. The overall purpose of this study is to enhance theoretical knowledge in both industry and academia about the VMI concept when it is used in contexts other than retail, and especially to determine how the manufacturing supplier could leverage the possible benefits obtained through a VMI relationship. For the scientific community, this licentiate thesis adds theory to the existing body of knowledge regarding the usage of VMI in contexts other than retail, and especially by examining a supplier’s role in the VMI relationship. The thesis also provides some guidance to industry regarding the concept of VMI for those companies who are interested in implementing such a relationship. The thesis consists of an introductory essay and a collection of three research papers. In order to answer the different research questions in the three papers, a few different research methods have been used. The first paper used a literature study, empirical data and a focus group technique to answer the research question. The second paper included in the thesis is based on a multiple case study where Swedish companies who have implemented VMI were scrutinized. The third and final paper used computer simulation as the main research method. The findings of the study are first of all a proposed framework for characterizing the design of VMI systems in order to be able to study and analyse different VMI systems. The framework illustrates that there are many ways to configure VMI systems, which has often been overlooked in previous research. The findings indicate that there probably are configurations that are not optimal, if benefits are supposed to be given to both a supplier and a customer in a VMI relationship. The research results from the second research paper propose that a supplier is not solely responsible if he manages to utilise the VMI information in his upstream planning processes; attention is called to the design of a VMI system and contextual factors that vary depending on the environment in which the VMI system is being used. The design of a VMI system is found to be very important for being able to really utilise the concept’s potentials. The findings from the third and final paper suggest that the supply chain would benefit if a supplier would reach a higher level of integration when using the concept of VMI, by taking more sources of need into consideration in each replenishment planning cycle. This viii would imply that a supply chain would benefit if a VMI system were designed to support a higher level of integration. The licentiate thesis’ contribution to the scientific community is a framework to be able to analyse different designs of VMI systems in order to find those configurations that might not be so beneficial and those that are more optimal from a supply chain perspective. The thesis also contributes new knowledge about what affects a supplier’s possibility to utilise VMI information in his upstream planning processes, to be added to previous findings. Another contribution is the integration model where three different dimensions of integration in VMI relationships were identified. The final contribution of the thesis is the findings suggesting that there is a benefit to the whole supply chain if reaching a higher level of integration when using a VMI system. One of the industrial contributions of the licentiate study is the framework that could be a foundation when discussing the design of a VMI system between a customer and a supplier. Another contribution is the identified need of understanding how the design of the VMI system, and in which IT system that inventory is controlled, will affect how well the concept of VMI might be utilised. The final contribution is to provide a guideline for designing a VMI system that would reach a higher customer integration when doing VMI replenishments, since it would affect the whole supply chain by requiring fewer inventory levels in order to maintain set service levels. The research project has been conducted in close cooperation with industry, and especially with Alfa Laval and Ericsson who have been industrial partners in this project. The project has been financed by VINNOVA and CeLIT.