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26571 Downloads1 I Published: 05 May ,2017
The literature review presents a critical evaluation of researches that are conducted by authors in the field of inventory management which helps in reaching the objectives of study. Various areas related to the research topic have been bestowed in the present section. The purpose of study is to gain sufficient knowledge in the field of inventory Reduction through Vendor Managed Inventory (VMI). Therefore, below literature review represents the finding of the related topics of research.
Supply chain management is the foremost concept of operation management that is based on two Ideas. The First is that every product should reach to the end user. Second is of effective management of operations. Supply chain management refers to an active management of supply chain activities which can lead to maximum customer value.
“Supply chain management is defined as the set of approaches used for making effective integration of suppliers manufactures, warehouse, and stores for provide the products at the aright quantities, to the right locations, and at the right time and to minimize system cost.”
According to Mishra and Raghunathan (2004) SMC is used to achieve sustainable competitive advantage. Using such tool the manufacturing organization can effectively manage their productions, warehouse, and stores, so that final product can be distributed to the end user at the right quantities, to the right locations, and at the right time. However, it will lead to cost efficiency for business entity while achieving higher level of customer satisfaction.
The existing business environment is totally changed in respect with previous one. Today's corporate environment has become more competitive so organization dealing in same field needs to gain competitive advantages. Core competencies are just related to reduce the cost but it is also referred as the distinguished offering from rivals. As per Disney, Potter and Gardner (2003) organizations have to focus on best outcomes from manufacturing and supply process. Supply chain management has enabled organizations to rethink on improving operational process and restructuring the whole supply process to gain a competitive edge. The use of supply chain management has enabled the corporate entity to develop a unique image in current competitive market. SCM strategies are useful for companies in choosing the right partners, resources and work force that are related to the strategic decision. It also helps in enhancing the market positioning for a corporate entity.
According to Tyan and Wee (2003) Focusing towards the tools of SMC, organization can develop core competencies in niches and specialization areas. They have said that organizations need to go for a big picture of the whole process of supply. Further, it is essential to figure out the process that can reduce, eliminate the wastage of resources in supply of goods and services. SMC also provides value advantages to corporate entities rather than offering services and products to customers.
Supply chain management affects the success of an organization (Cheung and Lee, 2002). At the time of purchasing goods and services from the suppliers, there can be seen a complete transaction between buyer and the providers of products and services. In such case, buyers gain something in return of monetary value. In some cases, it can be seen that suppliers or manufacturers deliver the products directly to the consumers. Kuk (2004) has revealed the fact that there are many steps that are involved in delivering a product to an ultimate user. However, before to gain knowledge over supply chain management and its importance, it is crucial to understand various components that are essential in supplying products and services to customers. As per the words of Angulo, Nachtman and Waller (2004) Supply chain management is a combination of two basic ideas. The first idea says that the product needs to be delivered to the end user or it has to deliver at the destination from where customer can have product in the convenient way. Organizations have to put cumulative efforts so that the products can be delivered to the finest destination of customers. The arrangement of providing products to the customers in a more convenient way is called as supply chain. As per the second idea, the organizations give attention towards the events that are happening within business. On the other hand, they do not focus towards the indispensable components of chain (Yao and Dresner, 2008). It puts negative impact on the minds of customers and they think that markets are not treating well to them.
Management of supply chain is important so that customers can be provided with satisfactory products at their preferred time and place. At the similar time, it also helps in developing involvement of business entities in their operational functions. According to Pohlen and Goldsby (2003) effective supply chain management is important for achieving operational efficiency within the organization. The particular technique is used to provide customer satisfaction and helps in developing quality of operations. There are various reasons for which Supply chain management has become critical part of operational success. The use of supply chain management is important in boosting the customer service and enables the business entity in providing right product at the right place. Although, it makes sure that the projects are served in a sufficient quantity but it needs to put more efforts. In addition to this, Claassen, Van Weele and Van Raaij (2008) have said that the products need to be available in the location that customers expect. It is essential to use supply chain management to the customers so that they can have quality after-sale support.
The tools of SMC are significant for improving bottom line of production and supply. Side by side it helps in reducing the wastage of resources and effective management of large fixed assets such as plants, storehouse and transportation vehicles that are mostly used in the supply chain. Sari (2007) has revealed that cash flow of organization can be increased due to expedited delivery of products, hence, organization can gain more profits. The importance of supply chain management is crucial in supplying of day to day products. Customers are the people who are highly benefited because of using supply chain management. However, they are considered as the important part of chain but they are the elements on which the management of chain is based. In case the products reached to them at the specific time, they tend to be more satisfied or vice-versa.
JIT is termed as Just in time manufacturing that is used for effective supply chain management. Use of JIT enables manufacturing entities to produce quality of product at the exact time that is required. According to the statement of De Toni and Zamolo (2005) JIT manufacturing keeps the stock holding cost at minimum level. It helps in removing waste from production process. With the help of JIT system right quantity of products are produced with improved quality and with zero inventory and zero lead time.
Material requirements planning is a kind of manufacturing planning in which manufacturing units schedule the level of inventory and control the cost occurred in manufacturing processes. Nowadays, for MRP organizations are using software having three objectives that are explained in following point:
Electronic Date Interchange (EDI) is the technology that helps in conducting supply chain operations. EDI is a kind of data intermission system in which information related to manufacturing process can be stored and used in further stages. The above techniques are related to the inventory management which is the foremost function of manufacturing organizations. These tools will be beneficial for organization in creating invoices and purchase orders, generate receipts and control inventory-related accounting. Inventory management is must for supply chain management. According to Kirriemuir and McFarlane (2004) SMC leads to cost savings, largely through reductions in inventory. Effective inventory management is at the core of supply chain management excellence. The specific tools are important to provide competitive advantages to business entities. However, implementation of inventory management techniques provides various benefits to organizations in the way of increasing profits, improving efficiency, reducing wastage of material, cost reduction and so on. Use of SCM tools and techniques enables corporate entities in diagnosing the supply based problems and in effective management of resources.
Vendor managed inventory (VMI) is an effective strategy in which the supplier of products and services is totally accountable for effectual supply. In other words, it is a business model in which vendor creates an order instead of distributors who are supported by the information acquired by them. According to Dong and Xu (2002) the effective supply of products and services can be done through proper planning and coordination between the manufacturer and supplier. In this model, the buyer of products provides certain information that is related to product delivery to a vendor, who supplies the products and services. Although, supplier of the product or services takes full responsibility for providing agreed goods at a convenient location but in whole process, third-party logistics providers can be involved in order to ensure that a sufficient inventory is being stored by the suppliers to make a balance between demand and supply. It is considered as a mighty tool for creating a lean supply chain, however, it supports organizations in eliminating the problems that are related to forecasting and scheduling of supply processes. Disney and Towill (2003) have revealed that manufacturer decides when to replenish the inventory. In this particular technique, suppliers use automatic electronic messages. This method is mostly used by the industries like, departmental stores, apparels and automotive, paper and plastic manufacturing. Tyan and Wee (2003) have identified that the major objective of using VMI method is to decrease inventory and improve customers services as well as gross margin.
According to Mishra and Raghunathan (2004) VMI is the win-win cooperation strategy that can be used by buyers and suppliers in which the inventory management is improved. Using this method organization can reduce the cost of inventory that will enable them to offer products at reasonable prices. It can be seen as the new inventory management thought process that is used for enhancing the coordination between supply chain and it is also used for improving economic process of supply. Yao and Dresner (2008) indicated that VMI is an important strategy that is useful for big entities. However, the use of VMI tool can improve supply chain performance and help in establishing coordination between supply chain firms. Dong and Xu (2002) has constituted VMI supply chain model which is based upon buyer-driven supply chain relation. In the particular study, the effects of VMI on supply channel have been presented. Yao and Dresner (2008) have explained that VMI reduces total costs of the channel system in short run but due to certain situation, it leads to decrease the purchasing price and supplier’s profits. However, it has been identified that supplier’s profits can increase more than expectations in long run.
Celestica Thailand, an EMS company is providing printed circuit assembly (PCA),box build and direct order fulfilment.The core services of company are supply chain management solutions,design services along with engineering services.The company is needed to introduce effectiveness in management of supply chain. The most optimal way to improve supply chain management is implementation of vendor-managed inventory (VMI). The in-bound VMI programs can be useful in reducing manufacturing costs, reduction in inventory, increasing competitiveness and in meeting customer satisfaction.
The revenues of company have been decreased from last few years. Including to this, the market share of company have also declined. Hence, the profitability of company has been decreased. The organization is dealing in the electronic manufacturing service industry. In this corporate sector, the cost of manufacturing and supplying products is too high. The critical factor for business is to lowering or reducing the cost so that competitive advantage can be gained. According to the words of (Fawcett, Ellram and Ogden, 2014) The industry players select the location which is suitable for cost effective manufacturing. However, the cheap labour cost and effective supply chain management can be the prime solution to improve the competitive edge. The company believing in reducing the cost of suppliers and developing the strategies that reduces cost across the supply chain practices. Adding to this, supply chain and procurement officer of Celestica are committed to make effective operation in the manner for reducing cost. Organization employs VMI method in supply management activities to get more benefits with excellent business performance. Sherer (2005) found that Celestica has developed e-business solution support for improving customer services which has helped company to improve information quality. VMI is also used by EDI (electronic data) which improve agility and supply network. Key integrated services provided by the company are Order managerial skills, Build to order, configure to order and Global order fulfilment. However, such activities should be conducted by focusing on Six Sigma quality and continuous improvement. Celestica therefore manages VMI programs and import-export compliances so that tailored services and solutions can be provided. The major aim of VMI is to reduce the inventory cost so that the overall cost associated with manufacturing and supply of good can be reduced. Using VMI, one can minimise the inventory holding cost hence, the cost of production will be reduced. The company is bound to an agreement which determines inventory levels, fill rates and costs. This arrangement can improve supply chain performance and it will support in reducing inventories and eliminating stock-out situations.
The purpose behind using VMI is to achieve competitive advantage in the market. It is a kind of win-win situation for both consumers and suppliers. As per the words of Claassen and Van Raaij (2008) suppliers can develop their own production plans and ordering schedule so that specific requirements of customers can be met. However, major benefits of using VMI technique is to stabilize the production level of organization and optimizing transportation. Side by side the cost of administration and inventory can be decreased. Furthered, the coordination between supply chain partners can be improved meanwhile reducing lead times.
In his study Sari (2007) has revealed additional benefits of VMI can be seen from the point of view of supply chain system, it improves the overall supply of product by preventing sub-optimization. As per the policies of traditional supply chain, consumer were the authorized person for deciding the time and amount the replacement. At the time of taking such decisions they considered the actual inventory and operating cost. But, the supplier's transportation costs and production capacity was ignored. In facilitate sub optimal decisions within the organization. Monczka amd Handfield (2008), has outlined that VMI enable vendors to exchange the information with customers continuously. In addition to that, Sahay (2003) has found that VMI has significant benefits for both the parties customers and suppliers.
The vendors can get the timely and undistorted demand signal that will help in improving supplier services. Having, these kinds of inventory management programs suppliers can receive the refilling orders from distributes. While using VMI and its related programs, suppliers can get information of stock level through electronic data interchange and internet. In addition to that, retailer can share the information related to purchasing and upcoming sales (Kuk, 2004). Better relations with market customers can be made that is essential for organizational growth. The suppliers can reduce the inventory levels and can improve customers services. As per Chan and Wu (2002) suppliers can be benefited with reduced inventories as well as their services can be improved. Overall supply chain management can be improved with the practices of VMI. Kirriemuirand McFarlane (2004) found that the inventory level in the organization can be increased as in the VMI process retailer can monitor the inventory levels and can take effective decision over number of orders, delivery methods, and the supply time. In addition to that Srivastava (2007) has said that VMI system enable organization reduce demand uncertainty allow vendors to maintain minimal inventory and production cost. The foremost benefit of organization of implementing VMI is to make effective balance between the conflicting performance measures of inventory holding cost and customer service.
The benefits of VMI have been described by Cheung and Lee (2002) in the way for reducing the risk of demand amplification in supply chain process. Kuk (2004) has outlined the major benefits of VMI that are reduce costs, increase service and provide greater transparency in the supply chain. According to Tyan and Wee (2003) suppliers are most benefited as they can easily optimize the production process and can meet demand of market customers. Forecasting for future demand for organizational products can be down. It will lead to reduction in wastage of resources and will reduce the cost of inventory. Dong and Xu(2002) has found when VMI is implemented in large scale or multinational organization so that suppliers can be benefited with flexible replacement schemes. Not only, It will enable organization to have full use of resources and reducing the wastage of scare resources but also overall transportation cost can be reduced. Mishra and Raghunathan (2004) has presented one another advantage of VMI with is cost effective in inventory management. It also helps in reducing uncertainty that enable suppliers to promote stock safety. In addition to that management of supply chain can be improved along with reducing forecasting mistake. Further, in the study of Darwish and Odah (2010) they have estimated that companies can reduce capital inventory, in addition to that VMI will require 20–30% of receivables as an expenditure. In the study of De Toni and Zamolo, (2005) it has been identified that VMI is used in big Department stores such as Wal-Mart, JCPenney and Dillard that have enabled management to improve inventory turnover by 20%to 25%. Further, it has been identified that administration costs can also reduced which are beneficial for customers (Mishra and Raghunathan, 2004). Use of VMI process enable organizations to eliminate extensive materials' requirement planning and they can place the order of individual in broad purchase orders. Hence, they are not going to have any kind of administration cost that will affect the prices of products.
All these things are essential for the organization to provide customer satisfaction and achieving their loyalty. In other words, manufacturing companies can gain proper information and can understated the potential demand from market. It makes production and supply process easier than any other organization in the market (Pohlen and Goldsby, 2003). The fluctuations can be reduced which enable company to offer proactive services and better products to customers at reasonable prices. As per the words of Cheung and Lee (2002) it also supports management in making better relations with the customers rather than focusing of selling. Angulo Nachtmann and Wallet (2004) reiterated the advantages of VMI include enhanced customer loyalty. The customer can be attracted towards the product of company in case they are offered with effective delivery of products at reasonable prices. As per Pohlen and Goldsby (2003) customer are also benefited with the use of VMI in the organization as they can get better quality product at their desired location in expected time. In this way customers can be offered with better products as reasonable price. The study conducted by Kuk (2004) argued that lower inventory level can be obtained by customers meanwhile they can have reduced administration costs and risk of stock outs. In addition to that service can be improved that will provide direct benefits to the customers.
Order management and fulfilment is considered to be core competencies for organizations supply chain management practices. According to Pohlen and Goldsby (2003) in today competitive environment, maintenances of order management and fulfilment has become a key issues for manufacturing companies. At the similar time, it has also become tough task for the entity. Sahay (2003) has discovered that the companies who are operating in global environment are facing such issues more than the companies who are operating in domestic region. The reasons behind such problems are explosion of order and delivery channels, increased complexness of global supply chain and improving expectations of consumers. Srivastava (2007) said that multinational manufacturers have faced such issues while having multiple distribution centres, lots of inventory locations and a diverse mix of suppliers. VMI enables corporate entities how to standardize business processes in order to gain visibility into inventory levels and the order fulfilment process (Yao and Dresner, 2008). Using such technology the corporate entity can build a more efficient supply chain and can finally make improvements in customer satisfaction. It will helpful in gaining competitive environment. Celestica's Vendor Managed Inventory (VMI) method based on inventory, forecast. Further, it can be used for exception-based alerting to proactively manage the process - of eliminating errors, managing inventory and fulfilment of orders at time. Adding to this, VMI processes and inventory management controls operations, while controlling operating cost through which new levels of efficiency and profitability can be achieved. According to the words of Yao Evers and Dresner(2007) VMI can be said as an alternative for the traditional order based replenishment practice. However, it is less costly than the traditional one. VMI puts emphasizes on solving replenishment through better supply chain coordination and provides the opportunities for managing customer’s entire replenishment process.
The use of VMI enables manufacture to manage the relative inventory requirement with changing order frequency. Under the engagement of VMI program supplier or manufacturers take the responsibility of managing the firm’s Inventory. According to Monczka and Handfield (2008) the process of managing inventory involves monitoring, planning and directly replenish inventory at warehousing. Based on an operational perspective suppliers of products are liable for firms inventory control. The vendors of product normally collect the data related to organisation's stock level, sales of goods, demand of products etc. through electronic data interchanges from the firm. Based on such information production manager and vendors decide the maximum and minimum limits of inventory that should be at the production location and in warehouse at any point of time (Marquès and et.al, 2010). The company decides when stock is to be replenished along with its quantity, or else responding to orders placed by the company.
The VMI arrangement relies on the contract based on financial terms, inventory constraints and performance target so that firm as well and suppliers can measure their liabilities for management of inventory. According to Lambert (2008) the manufacturing company use VMI techniques to make possible improvements in material flows in the company. Mostly the firm’s inventory is located at the production place which is transported at the time of production. It increases the operational cost of operations. Using VMI techniques production managers can plan for the required inventory and can a place it, direct from the supplier's place which reduce the cost of operation and keep the inventory level low (Sherer, 2005). However, it can also be used to show requirement in a more transparent manner. The manufactures do not have to guess that what is the actual requirement or demand but they can directly know what product is to deliver. As per Disney and Towill (2003) in most of the case organization trigger supplier through purchase orders. Under the arrangement of VMI, the manufacturers places the order at the time when the inventory is depleted by the end of the month when the demand of products increases from customer's side. The study conducted by Christopher (2012) found that VMI involves making sure that the buyer has required level of inventory by adjusting the demand and supply gaps.
Short order is the situation when customers demand suddenly increases for a shorter period (Srivastava, 2007). In case of high short orders, it becomes difficult to manage the delivery of purchase order on timely manner. It can lead to poor service delivery. With an objective of executing the VMI and solve the Short order issue, the organization is obliged to provide suppliers with a few essential information such as demand forecast, firm inventory level, order rate etc. (Darwish and Odah, 2010).
VMI is the technique also referred as continuous replenishment or supplier-managed inventory. The technique is mostly used by organization working in retail industry. As per Fawcett, Ellram and Ogden (2014) supplier have responsibility of managing the customer's inventory and making effective decisions. The decisions include when and how much inventory needs to be delivered to the customers. It has been identified by Sahay (2003) that organization uses the advanced information technology to access the demand from market. They make direct contacts with customers to assess there requirements. Mainly used technology in VMI process is Electronic Data Interchange (EDI). Further, Hugos (2011) has defined that organizations use Internet technology to monitor the customer's demand and stock level related information. These technologies are less expensive for the company and helps in reducing cost of material handling in supply process. As per Lambert, (2008) main reason of using such technology is to reduce cost in supplying process. Ellis (2003) has revealed that this particular strategy is common within the retail industry and the VMI program has become more popular in the industry. The cost effectiveness of VMI technique can be identified in Wal-Mart and P&G who have adopted the technique in their supply chain. VMI has significant impact on direct and indirect inventory cost within the organization.
As per Kuk (2004) VMI is helpful in resolving the issues related to direct materials cost. In addition to that effective allocation of resource can be done in the organization, with the help of VMI process. Darwish and 0dah (2010) have identified the process of VMI and said that it begins with identifying suppliers who have enough capabilities and willingness to execute the vendor managed inventory process. As per Cheung and Lee (2002) it represents the entire supply chain system of an organization. The organizations have to handle direct and indirect inventory between the process of production and supply of goods. As per Claassen and Vaan (2008) there are two kinds of inventory cost such as inventory carrying costs and warehousing costs. The cost included in acquiring raw material is ref feed as inventory carrying costs on the other hand the cost involved in making facilities for warehousing the finished goods before supping then to customer place can be said and warehousing cost. DTe oni and Zamolo (2005) have said that inventory cost include costs that vary with the level of stored inventory. In case the stored finished goods are increased the cost of inventory handling also increases. In addition to that Marquès And et.al (2010) have identified that such cost include capital costs, inventory service costs, storage space costs and inventory risk costs etc. Barratt (2004) has said that there is only one cost that can be reduced in instant way that is referred as warehousing costs. As per their words theses are all the expenses that can be eliminated or must be increased in case the volume of warehousing installation changes.
Fawcett, Ellram and Ogden (2014) have revealed that most of the warehousing cost doesn't change without having any change in inventory level. It trends to change in case the location changes. In the study of Kirriemuir and McFarlane (2004) it has been said that indirect materials' automation has been integrated into the process of VMI that helps in identifying the cost associates in the supply of product as the place of customers desired. It can be said that management needs to identify the indirect materials that are integrated with supply process. As per Ellis (2003) in most of the organizations indirect materials is an integrated combination of existing facility, leverage vending hardware, software, provider and maker process change which meets tool supply requirements at lower cost without non-value added steps. In this way the studies conducted by various authors are indicating that the VMI can bean effective tool for inventory reduction.
Thus, Celestica Thailand can employ VMI method in supply management activities to get more benefits with excellent business performance (Disney and Towill, 2003). Sherer (2005), asserted in their study that Celestica has developed e-business solution support for improving customer services which has helped company to improve information quality. VMI is also used by EDI (electronic data) which improve agility and supply network. This engineering company is providing integrating services to customers by using in-bound VMI programs. Key integrated services provided by the company are Order managerial skills, Build to order, configure to order and Global order fulfilment. Such activities should be conducted by focusing on Six Sigma quality and continuous improvement. Celestica therefore manages VMI programs, import export compliances so that tailored services and solutions can be provided.
The literature review has identified that various studies have been conducted on using VMI as a cost effective tool but there was no evidence found in respect with actual reduction of inventory through Vendor Managed Inventory (VMI) Program. That can be said as a research gap. The present research aims at analysing reduction of inventory through Vendor Managed Inventory especially for electronic manufacturing companies. Various authors have founded that VMI is an effective strategy in which the supplier of products and services is totally accountable for effectual supply and suppliers can develop their own production plans and ordering schedule. It has been said as a useful tool for increasing production level and optimizing transportation.
In order to serve the purpose of research, the use of VMI for reduction of inventory is to be identified. The aim of conducting present research is to fill the research gap and to identify the level of reduction in inventory through using Vendor Managed Inventory program. The present section include the finding of different authors in respect with present topic. It explains how business entity can reduce direct and indirect cost of orderings process whiling using VMI techniques. The concept of Vendor Managed Inventory have been defined along with explaining its scope. As a benefit, vendor can manage to oversee distributors’ inventory levels. It supports the vendor in cost cuttings and rendering the products and services at lower prices. In addition to that, the importance of effective supply chain management have been described in the sections that have been pretested by various authors in their studies. The use of Vendor Managed Inventory in present scenario and its scope have been delineated in this review of literature. Additional methods of reducing direct and indirect inventory cost and implementation of VMI are conferred.
The aim of present report is to identify inventory Reduction through Vendor Managed Inventory (VMI) programme. For this purpose, the case study of Celestica Company has been taken into consideration. A research design can be said as the systematic and scientific plan, through which research question can be studied and answered. It is a very important part of the research methodology as it helps an investigator in defining research study right from data collection techniques to data analysis. The present study will be beneficial for Celestica Company to identify the benefits of using VMI technology further, it can be beneficial to various companies that are either new entrants in the market and also to the existing companies who want to improve their Supply Chain Process.
Purpose of research: “ Find out inventory Reduction through Vendor Managed Inventory (VMI) – The Celestica Case”
The research question are :
The main aim of this research paper is to find out and analyse the ways of lowering down inventories using vendor managed inventory programs. Thus, to fulfil this aim, the following research questions have been designed:
The research methodology includes certain steps which are beneficial in providing answers to the research questions about Inventory Reduction through Vendor Managed Inventory (VMI) – The Celestia Case. In the proposed study, positivism research philosophy will be employed as it does not interfere with subjects. Deductive approach is proposed to be applied in the research for this manuscript because significance of VMI to entire manufacturing and engineering industry will be reviewed and conclusions will be drawn particularly for Celestica. Furthermore, descriptive research design is to be formulated because it seeks to describe impact of different variables. By employing descriptive research, impact of VMI tool on a Celestica will be identified. Moreover, the ways of reducing the cost of purchase through Vendor Managed Inventory technique will also be assessed. For analysing the data, both qualitative and quantitative analysis will be done through thematic analysis. Data will be collected form MIS/ERP System of Celestica on judgemental cum convenience basis. A total of 50 colleagues will also be approached through telephone and email because of limited time.
In the above chapter, the research goal and design for the present dissertation has been discussed along with research questions. Further, the section has presented the research method as well as tools that are used to answer the research questions.
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