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Reduce Inventory with these 3 Supplier Partnership Strategies

Here are three inventory reduction strategies that are a result of supplier partnerships. Each strategy requires closer relationships with suppliers in addition to web-enabled information systems to track and monitor product movement and create better forecasts. Issues to consider when considering these strategies include confidentiality and inventory ownership.

• Quick Response Strategy

  This strategy has been successfully used in the grocery retailing industry. Using this strategy, suppliers have links to the retailer’s Point of Sale (POS) data, which is essentially sourced from cash register terminals from all retail locations. Suppliers use this information to optimize their production and inventory levels using actual demand. The retailer is still responsible for ordering, however the supplier is better able to manage its inventory and reduce lead times as it improves its forecast.

• Continuous Replenishment Strategy

  As with the Quick Response strategy, retailers must share their POS data with the supplier. An agreement is then made on the delivery frequency and inventory levels with both parties. The result is increased inventory levels. Typically, the supplier gradually reduces inventory levels further while maintaining service levels.

• Vendor Managed Inventory (VMI)

  The supplier takes on more responsibility with this initiative, as it determines both the inventory levels and delivery frequency to maintain agreed-upon in-stock levels. Wal-Mart, in conjunction with Proctor and Gamble significantly increased inventory turns when they first piloted this initiative and they have rolled-out this concept to many of their suppliers using their in-house Retail-Link information system. This system tracks past sales history, trends, out-of-stocks and other performance data going back two years to help reduce inventories while maintaining service levels.

Issues to Consider:

• Confidentiality

  By far the most important consideration is the sharing of competitive information with suppliers. The development of a high level of trust is a prerequisite before undertaking such a partnership. In the VMI case, the retailer is relying on the supplier to have an appropriate level of stock at their locations. Failure to do so would mean lost sales for the retailer.

• Information Systems

  Advanced information systems are necessary to facilitate the transfer of data to/from the retailer and supplier. The system should be web-enabled and use bar-coding or even better, RFID technology to ensure data accuracy. The system may either be developed in-house, or outsourced to a B2B e-commerce provider.

• Inventory Ownership

  The ownership of inventory is dependent on the level of the supplier relationship described above. Who decides on the replenishment of inventory will determine who is responsible for the inventory. Under the VMI agreement, Walt-Mart does not pay for the inventory until after it sells it to its customer. This greatly reduces inventory costs for the retailer, pushing them back to the supplier. Ultimately, in order to have a sustainable partnership it is important to calculate inventory cost reductions and share the savings between both partners.

Steps to Develop a Partnering Strategy:

1. Agree on and draft a contract that details performance measurements, inventory ownership and required service levels.

2. Determine what the information systems requirements are to drive the process and invest in the appropriate technologies.

3. Monitor and track inventory reductions and share the savings as agreed upon.