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DOI: 10.1145/ 1409360.1409384

BY PETER DUCHESSI AND INDUSHOBHA CHENGALUR-SMITH

Enhancing Business Performance via Vendor Managed Inventory Applications

MODERN INFORMATION AND COMMUNICATIONS TECHNOLOGIES

(ICTs) connect companies in new and novel ways and, as a result, allow them to develop new competencies for competing successfully. ICTs make it possible for companies to collaborate on the design of new products and services, congure new sales and distribution channels, and efciently replenish those channels to reduce costs and maintain high levels of customer service. The growing electronic interconnectedness of modern companies suggests that a companys competitive success depends, to a large extent, on its entire supply chainrather than on just itselfand the ability of the supply chain to deliver products quickly, reliably, and inexpensively to each supply chain participant, including end consumers.

With the emergence of Web services, service-oriented architectures, and new, powerful, commercially-available supply chain applications, the notion of supply chain improvement can take on multiple meanings.a To narrow the scope of inquiry, we focus on interorganizational Vendor Managed Inventory (VMI) applications. VMI applications offer a means to improve inventory management and the order fulllment process. With VMI applications, given customer demand, on-hand stock levels, and other data and information, suppliers (or vendors) can automatically replenish a trading partners inventory without the need for approved purchase orders. VMI applications can connect companies via one database and/or network and, as a result, provide several important supply chain competencies, namely electronic integration of supply chain data, information, and computer-based business systems; real-time access to and use of specic supply chain data and information (even knowledge) at multiple locations; sufcient information for high-velocity decision-making; and increased visibilityb of business events, materials, and products/services. In line with CEO, CIO, and supply chain executives concerns, we concentrate on VMI application benets (for example, reduced supply chain costs), VMI application-enabled competenciesc (for example, access to supply chain data and information) that are positively related to those bena Supply chain improvements may be intra-organizational
(for example, across the business levels, business functions, and/or business processes of one company) and interorganizational (for example, between the business levels, business functions, and/or business processes of two or more companies) in nature. Obviously, the applications and issues (for example, type and degree of data and information exchange) will vary, depending on the circumstances. To increase our precision, we focus on a single application area. b Visibility is the ability to see all data and information about business events, materials, and products/services at any point and time. It allows companies to determine what moves, where, when, and how. c Dynamic Capabilities Theory suggests that a companys competencies and capabilities produce meaningful business benets, culminating potentially in a signicant competitive advantage.7 According to the Theory, competencies are distinctive activities (for example, electronic integration of supply chain data, information, and computer-based business systems), while capabilities are the ability to develop, integrate, and deploy internal and external competencies. We emphasize competencies because, for some time, the IT eld recognizes that ICT alone conveys no particular advantage; the source of advantages are the competencies imparted by ICT.

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ets, and implementation elements (for example, business process redesign) that affect those competencies, as determined by one Web-based VMI application, which we describe below. The application links separate companies and their facilities through a common database and network.d Thus, we are not able to make statements about issues experienced by users of other proprietary and commercially-available VMI applications.e As we demonstrate here, VMI applications can provide several important competencies that beget important business benets, including improved competitive and nancial position or at least the background music for it. Yet, how should companies go about attaining these competencies and benets? Do companies need a strategic imperative (for example, The competition is ahead!) to deploy a VMI application? Should companies mandate VMI deployment rather than build mutually benecial relationships with their suppliers and/or customers?f What constitutes best practice? Using data collected from chemical and plastics manufacturing facilities that employ one Web-based VMI application, we answer these (and other) important questions and provide insight into successfully implementation of VMI applications and the attainment of important business benets. The Context and VMI Application GE Operations Services Global Vendor Managed Inventory (Global VMI) g is a Web-based service that is used by chemical and plastics companies belonging to Fortunes top-10 list.h Global
d Our data set includes data on benets, competencies, and
implementation elements of one Web-based VMI application. Consequently, it is completely congruent with the scope of our inquiry and the concerns of senior managers. e For more information about VMI and a list of commercially-available software vendors, see www. vendormanagedinventory.com. f Large companies (for example, Wal-Mart) have mandated IT projects and have garnered certain business benets, eliminating the time, effort, and energy that go into building a positive supplier-customer relationship. For example, in March 2004, Wal-Mart mandated that its top 100 suppliers be radio frequency identication (RFID) and electronic product code (EPC) compliant for a range of products.9 This (and other similar) event(s) suggest that relationship-building may not be as important as generally thought. Thus, it is not obvious if establishing a positive supplier-customer relationship is important for implementing VMI applications. g In April 2003, Jeffery Immelt, CEO, General Electric (GE) Corporation, sold the Global VMI business to IntelliTrans, LLC, an industry leader in providing supply chain products and services. A new company, IntelliTrans Global VMI, LLC, is marketing, delivering, and providing complete VMI services worldwide. GE Plastics holds a minority equity interest in the new company. h Collectively, these facilities form a supply network (rather than a supply chain) because of the extensive cross sourcing that exists in the chemical and plastics industries.

VMI employs electronic sensors Table 1: Respondents to measure raw material invenCategories Percentages tories at Six Sigma quality levels; Functional Areas connects facilities through its Sales/customer service/order fulllment 27 Web-based communications ar- Purchasing/materials management 26 chitecture; and via its centralized Manufacturing 19 database and browser-based inLogistics/supply chain 7 terface provides a number of valuUnknown 21 able competencies (for example, Organizational Levels full supply chain visibility). Managers 33 For example, order-fulllment Non-managers 67 users at supplier locations and Sales purchasing users at customer loLess than $500 million 34 cations can view actual demand, $500 million to less than $1 billion 18 or draw down, at all silos and in$1 billion to less than $5 billion 12 ventory locations; consumption $5 billion to less than $20 billion 7 forecasts and on-hand balances; $20 billion and over 2 and shipments in progress. Users Unknown 27 can even receive alerts if inventory Number of Employees exceeds predetermined levels and Less than 5,000 48 download all data into their ERP 5,000 to 50,000 28 applications. Because of its inte50,000 to 100,000 1 grated architecture, Global VMI 100,000 to 200,000 2 permits, if authorized by suppliers/ Over 200,000 3 customers, access to inventory inUnknown 17 formation at upstream and downPosition in the Supply Chain stream locations. Global VMIs 54 functionality provides almost un- Beginning Middle 34 precedented connectivity and supEnd 12 ply chain visibility. Global VMI is different from Enterprise Resource Planning (ERP) and ERP and CPFR. As a result, Global VMI is Collaborative Planning, Forecasting, and easy to install and implement in a comReplenishment (CPFR) applications. pany, making it a benign, yet extremely ERP applications are expansive, includ- powerful, connectivity tool. ing a number of business processes (for example, accounts receivable, purchas- Respondents ing, and customer service). CPFR is a To gain a better understanding of VMI multi-step process for a supplier and applications, their benets, and potena customer to develop formal policies tial enablers, 89 Global VMI users comand procedures that build consensus pleted a Web-based questionnaire.j The sales forecasts, establish replenishment largest percentage (27%) of respondents plans,2 and manage structured work- is from sales, customer service, and orows.6 Global VMI can be used in place der fulllment (see Table 1). Non-manof CPFR and some companies are using agers outnumber managers two to one. its functionality alone to make replenish- Two-thirds of the facilities are large, ment decisions. Alternatively, a few com- with sales of over $500 million. Just panies use Global VMI to supplement over half of the facilities are positioned CPFR data points because Global VMI at the beginning of the supply chain. A provides real-time, Six Sigma data feeds third of the facilities are connected via about inventory levels at any location in Global VMI with at least 10% of their dia supply chain.i Global VMI is much less rect suppliers/customers, and 41% are expansive in scope than ERP, requires managing at least 11% of their materials less instrumentation to collect data than through Global VMI. A little over a third ERP and CPFR, and doesnt require ex- (36%) of the facilities are connected to tensive organizational change as does just one supplier/customer, while 11%
i Prior to Global VMI, our experience indicates that
companies rarely exchange end-to-end supply chain inventory data, stock in transit, and status of stock because of the prohibitive cost in doing so.

j We developed the questionnaire with several senior

Global VMI managers and consultants from GEs Global Research Center and rened it based on feedback obtained from 12 other clients.

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Figure 1: VMI Competencies and Benets

ning and replenishment practices, 71% have streamlined their replenishment processes, and 69% have developed an improved relationship with their suppliers/customers. Even the companies that have access to upstream and downstream inventory information via Global VMI are streamlining their purchasing processes, possibly beyond their immediate suppliers/customer; increasing their sales; and aligning, more effectively, resources with manufacturing demand. Clearly, a VMI application that provides the above competencies is capable of moving a supply chain to the next level: companies that develop mutually benecial competencies with their suppliers/customers via a VMI application and that leverage those competencies earn a number of important business benets. Impediments to VMI Applications Oddly, a few of the companies encounter problems, which may impede their VMI initiatives. Less than a third (30%) of the companies consider their inability to change established business practices as an important impediment. One out of ve companies feels that technical (20%) and functional area (20%) issues prevent them from fully leveraging Global VMI information with other business activities. Even though lack of trust among supply chain participants is not a major issue, it is more of a concern for suppliers than for customers, suggesting that suppliers may be more skeptical than customers of supplier-customer relationships. The apparent lack of serious impediments may be due to the fact that Global VMI is less intrusive from a technological and organization change perspective than, say an ERP system, which can involve multiple internal business processes and functions. Enabling Elements of VMI Initiatives and Emerging Best Practices We identify three primary dimensions of implementation elements that affect VMI applications. Companies can positively affect the attainment of VMIenabled competencies and benets through these implementation elements (see Figure 2). Information Technology A companys ability to successfully implement VMI is a direct function of its
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of the facilities are connected to six or more suppliers/customers. Over 90% of all respondents have been using Global VMI for at least six months. There is no systematic difference between respondents from the sell- (supplier) and buy-side (customer) of a business; consequently, the following results reect their combined perspectives. VMI Application-enabled Competencies and Associated Business Benets VMI applications can provide several important competencies and the level of competency varies across the respondents companies. We focus on the following VMI application-enabled competencies: Adequate information about suppliers/customers Access to inventory data at a suppliers/customers location Use of Global VMI to obtain more supply chain visibility Integration of Global VMI inventory data with a facilitys systems Access to inventory data at upstream and downstream locations A majority of companies (53%) have immediate access to data at suppliers/ customers locations and 67% have adequate information about their suppliers/ customers (see Figure 1). Interestingly, although Global VMI is capable of linking companies in any arrangement, most

companies prefer to implement just a dyadic connection at this time, limiting visibility to just their immediate suppliers/customers. As expected, suppliers were more apt to have access to data and information at downstream locations than customers at upstream locations. This is primarily due to the fact that customers ultimately determine suppliers downstream demand and, with knowledge of downstream demand, upstream suppliers can reduce the bullwhip effect, or extreme variability in ordering and inventory levels.k Only 28% of the companies have integrated Global VMI inventory data with their business systems, missing the opportunity to amalgamate important data and to develop a more complete picture of how supply chain activities impact their businesses. As a group, the Global VMI competencies are moderately to highly correlated with all business benets considered.l Companies that established these competencies receive numerous business benets (see Figure 1). For example, 72% of the companies have more efcient plank Other than to ensure adequate replenishment, customers
rarely need to examine upstream resources and activities because material has to be available to avoid extremely expensive shutdowns at customer locations. l We cite important and interesting correlations among competencies, benets, and enablers that are mentioned below. Moderate correlations have p-values <= .100 and high correlations have p-values <= .001. In all cases the direction of causality is obvious. At this time we refrain from more rigorous statistical analyses because of our intent to keep the analyses and associated interpretations simple, straightforward, and congruent with the Journals theme.

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IT. To make progress, it is critical that a company consider a VMI application as an enabler and use it to provide visibility and real-time integration of supply chain business processes. Consequently, the following four implementation elements constitute the IT dimension: Global VMI as a tool for effective supply chain management Sole use of Global VMI for replenishment decisions Investment in IT to enable supply chain visibility Use of Global VMI for real-time supply chain integration Although practice varies among the companies, an overwhelming number of companies (87%) indicate that Global VMI is a tool for effective supply chain management and 60% actually use just Global VMI for making replenishment decisions (see Figure 3). As a group, the four IT implementation elements are moderately to highly correlated with all the relevant competencies and business benets. Clearly, a VMI application that supports enhanced visibility and real-time integration of supply chain activities across multiple companies increases a companys supply chain competencies and directly, as well as indirectly, produces a number of valuable business benets. Although only 40% of companies use Global VMI for real-time integration of supply chain activities, many more would have beneted if they had followed this practice. Process Redesign Many companies have found that they need to modify their business processes to get the most out of their IT investments.1 Companies that are using VMI applications should align their supply chain processes in order to synchronize activities and identify the afliated data and information that needs to be exchanged.m Generally, companies change employees roles and responsibilities to be congruent with the new supply chain process(es)3. Consequently, the following four implementation elements comprise the redesign dimension:
m Certainly companies will have to redesign intercompany processes; they may also need to redesign or even eliminate internal processes (for example, paperbased processes) that cant keep up with the velocity of decision making and business events.

Figure 2: Benets, Competencies, and Implementation Elements

Changes in roles and responsibilities of personnel due to the Global VMI implementation Investment in redesigning the supply chain to link more effectively with suppliers/customers Modication of supply chain activities during Global VMI implementation Subsequent modication of supply chain activities (such as, some time after Global VMI implementation) A large percentage of companies (66%) redesigned their purchasing and

order fulllment processes with about two-thirds (40%/66%) preferring to do it at the same time as the Global VMI implementation (see Figure 3). Moreover, 64% of the companies changed the roles and responsibilities of buying and selling personnel as they deployed Global VMI. As a group, these process redesign elements are moderately to highly correlated with all connectivity measures and with all business benets. Process redesign is so extensive that 63% of the companies instituted an aggressive VMI

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Figure 3: Emerging Best Practices

program, where the suppliers fully manage their customers raw material inventory. Some 58% of the companies manage their raw material inventory, but allow their suppliers to view raw material balances and utilization. These results imply sharing material management roles and responsibilities and a clear move from the previous archaic practice of having customers in charge of materials management and purchasing-related activities. Also, a full VMI program is correlated with three of ve VMI application-enabled competencies and almost all of the benet items.n This suggests that companies should implement a VMI program via Global VMI or some other software application to attain business benets.o Organizational Support There are three types of organizational upport implementation elements:
n The three competencies are access to inventory data
at upstream and downstream locations, adequate information about suppliers/customers, and increased visibility of the supply chain.

o Considering the existing redesign elements, its surprising

that suppliers and customers feel the same. Generally, customers do not appreciate the extent of process redesign and accompanying changes in roles and responsibilities that take place to promote greater connectivity because suppliers ensure product availability both before and after connectivity improvements the product is always there! Thus, the impact of process redesign on enhanced connectivity and attainment of associated benets is often more obvious to suppliers because they bear the lions share of the process and connectivity changes.

strategic imperative, management and organizational support, and suppliercustomer relationship.p Strategic imperative provides the motivation, or logic, to move forward with VMI applications. Management and organizational support are important to successfully undertake any IT initiative4 maybe more so for VMI applications because of their interorganizational character. Finally, there needs to be a positive relationship between suppliers and customers5 to ensure that companies develop and maintain an environment that allows VMI competencies to emerge and ourish. Concerning strategic imperative, we use the following two elements: Optimization of supply chain performance Achievement of a competitive advantage A large majority (87%) of companies implement Global VMI to optimize supply chain performance (see Figure 3). Suppliers are more apt to pursue
p We organize the many organizational elements into
these three categories to demonstrate that companies must develop and implement a business strategy that incorporates connectivity; have senior management and organizational support for connectivity initiatives; and develop a positive relationship with their intended partners (i.e., suppliers and customers in the Global VMI supply chain).

connectivity initiatives than their customers to gain an advantage over competitors. Only 7% of the companies have Global VMI because their competitors have it. Thus, companies that have installed Global VMI are acting strategically and preemptively to improve their supply chains and to distance themselves from their competitors.q As a group, there is little correlation between the above strategic imperative elements and the relevant competencies. The supply chain optimization imperative is correlated with adequate information about suppliers/customers and increased supply chain visibility, while achieving competitive advantage over suppliers/customers is correlated with increased supply chain visibility and effective supply chain management. However, the strategic imperative elements are correlated with all of the benet elements. Thus, from a strategic perspective, companies see Global VMI less as a supply chain tool than as a means to improve supply chain performance and attain business benets. In fact, they may not even think of VMI applications as having strategic importance vis--vis their supply chains, which are clearly strategic in the companies minds. This is not surprising because the relationship between VMI applications and business benets has not been established as this report does as completely as the link between other management initiatives (for example, business process reengineering) and business benets. With regard to management and organizational support, we include the following three implementation elements: Purchasing (or sales) organizations support for Global VMI Top managements support for Global VMIs approach to supply chain management IT organizations support for Global VMI Most companies (75%) have the support of senior management and the support of the functional areas affected by Global VMI (see Figure 3). These management and organizational support elements are moderately to highly correlated with all competencies except access to inventory data at upstream
q This is surprising because it is our experience that most
companies focus on contemporary rather than future applications.

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and downstream locations and all business benets. Clearly, high levels of management and organizational support beget sought after competencies and lead to business benets. As with many business and IT projects, senior managers and functional area managers need to support VMI applications if they are to work as expected and result in positive outcomes. Finally, concerning the suppliercustomer relationship, we use the follow ve implementation elements: Formation of a supplier-customer relationship to satisfy mutual needs Suppliers and customers jointly determine supply chain roles, responsibilities, and activities Suppliers and customers negotiate service levels and raw material inventory targets Use of a cross-organizational team to manage the Global VMI replenishment process Suppliers and customers cross invest on major projects Through these activities, companies attempt to build, nurture, and maintain strong relationships with their supply chain partners. Excluding cross investing on major projects, a majority (at least 66%) of companies attempt to build working relationships with suppliers/customers (see Figure 3). Moreover, almost 100% of the companies consider their supplier/customer relationships to be extremely important and have a longterm relationship with their suppliers/ customers. As a group, the supplier-customer relationship elements are moderately to highly correlated with all competencies and business benets, suggesting that congruous relationships among supply chain partners and the active maintenance of those relationships are extremely important to successful VMI implementations. To improve a supply chain via a VMI application, in an inter-company team environment, suppliers/customers must grapple with organizational issues, including new roles, responsibilities, and activities of key personnel, and actively manage the routine inter-organizational aspects of the replenishment process. Interestingly, a little less than 25% of the companies have their suppliers/ customers mandate the use of Global
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VMI as part of a purchasing agreement. These ndings suggest that companies cannot mandate the formation of relationships and the adoption of VMI applications in contracts rather they need to build trust via joint investments and mutually benecial cross-company arrangements to grow positive relationships and promote increased connectivity.r, s Management Directives As empirically demonstrated here, companies including suppliers and customers; small and large companies; companies at the beginning, middle, and end of a supply chain that embrace VMI applications and collaborate with their trading partners can achieve a number of important business benets. Thus, it pays to connect via VMI applications, strive for the attainment of VMI-enabled competencies, and consider many of the implementation elements presented here. Companies should realize that improved supply chain and business performance is not just a matter of installing the appropriate hardware and software, as some managers wrongly believe. To improve supply chain performance via a VMI application and achieve the consequent benets, companies must follow these 10 simple rules: Maximize the sharing and integration of data and information to provide employees and managers with richer data sets and complete information Move away from just dyadic connections for greater access to upstream and downstream data and information to achieve more complete supply chain visibility Aggressively invest in ICT to enable supply chain visibility, greater access to data and information, and real-time integration of the supply chain Select, design, and implement VMI applications that are congruent with the companys business approach good t with systems, processes, and strategic intentions is instrumental Aggressively invest in supply chain process redesign to align suppliers and customers supply chain processr Some researchers and practitioners8 consider trust to be
just as important as ICT in collaborative supply chains.

es, synchronize activities, and promote easy access to data and information With partners, redene and jointly determine roles and responsibilities of supplier/customer personnel to be congruent with supply chain process modications Obtain senior management and organizational support to successfully commence, continue, and conclude VMI initiatives Charge a cross-organization team with the responsibility to actively manage connected activities and events to nurture and maintain a strong supplier-customer relationship Forget about mandating relationships among partners: build trust through cross-organizational management, joint investments, and mutually benecial working arrangements Finally, be proactive because some of the worlds largest, industry-leading companies are moving aggressively to improve their competitive and nancial positions via connectivity enhancements Hopefully, these directives will help companies better understand how to successfully create, manage, and/or benet from an accelerated move toward connectivity. Conclusion In conclusion, VMI applications enable several important competencies (for example, increased visibility of business events, materials, and products/services) that provide a number of important business benets. As demonstrated here, a number of notable companies are aggressively improving their supply chains and gaining the benets. Companies that arent equally committed need to reconsider and follow the 10 rules provided here.
References 1. Attaran, M. Exploring the relationship between information technology and business process reengineering. Information & Management 41, 5 (2004), 585-596. 2. Christiaanse, E. Performance benets through integration hubs. Comm. of the ACM 48, 4 (2005), 95-100. 3. Gardiner, S. C., Hanna, J. B. and LaTour, M. S. ERP and the reengineering of industrial marketing processes: A prescriptive overview for the new-age marketing manager. Industrial Marketing Management 31, (2002), 357 365. 4. Poirier, C. C. and Quinn, F. J. A survey of supply chain progress. Supply Chain Management Review (Sept. 1, 2003); http://www.manufacturing.net/scm/index.asp?l ayout=articlePrint&articleID=CA323602. 5. Shore, B. Enterprise integration across the globally disbursed service organization. Comm. of the ACM 49, 6 (2006), 102-106. 6. Steerman H. A practical look at CPFR: The SearsMichelin experience. Supply Chain Management Review

s Apparently there is more to be gained through collaboration

than imposition, which some large companies practice on suppliers/customers.

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(July 1, 2003); http://www.manufacturing.net/scm/ index.asp?layout=articlePrint&articleID=CA62995. 7. Teece, D. J., Pisano, G. and Shuen A. Dynamic capabilities and strategic management. Strategic Management Journal 18, 7 (1997), 509-533. 8. Welty, B. and Becerra-Fernandez, I. Managing trust and commitment in collaborative supply chain relationships. Comm. of the ACM 44, 6 (2001), 67-73. 9. Who gains, who loses, from RFIDs growing presence in the marketplace? Knowledge@Wharton (Mar. 23, 2005); http://knowledge.wharton.upenn.edu/article. cfm?articleid=1161. Peter Duchessi (p.duchessi@albany.edu) is an associate professor of Information Technology Management at the School of Business, University at Albany, State University of New York, Albany. InduShobha Chengalur-Smith (shobha@albany.edu) is an associate professor of Information Technology Management at the School of Business, University at Albany, State University of New York, Albany. 2008 ACM 0001-0782/08/1200 $5.00

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