When you've invested a decade in a system that has worked well and made your supply chain more profitable, it takes some courage to change course. But sometimes changing course can open up opportunities for improving operations and supply-chain relationships.
When the concept of vendor-managed inventory (VMI) emerged in the electrical industry back in the early 1990s, distributors were justifiably skeptical. The idea of sharing point-of-sale data with their manufacturers and giving them control of their re-order points at a time when distributors were working hard to get better control of their own inventory and operations seemed risky — this was in the heyday of Quality Management and Just-In-Time thinking. Distributors were pushing back on their vendors, wary of factory reps and independent agents who liked to “load the shelves” of their distributors to boost their own numbers.
Nonetheless, some electrical manufacturers suggested that distributors let them manage the inventory on their shelves and control restocking based on actual sales to improve efficiency and streamline inventory throughout the supply chain. The idea was consistent with Quality and JIT, but letting go of that control would take a leap of faith.
Hubbell Inc., Orange, Conn., was among the first manufacturers to propose VMI to their distributors. A transaction-cost study the company commissioned with the Gartner Group showed that a paper transaction cost $30 to $55. Handling the same order via electronic data interchange (EDI) cost $3 to $5, and VMI further slashed the cost to $1 to $3. Getting the distributors on board at first took a lot of reassuring, a lot of hand-holding, and when that didn't work it took money. Hubbell devised a distributor incentive program to share the savings from the efficiencies gained via VMI, and distributors began to sign on.
John Riley, now manager of e-programs for Hubbell Wiring Systems, was one of the key people working on the back end of Hubbell's VMI program when it was developed in the 1990s. Riley recalls, “To win over our distributors to the concept of VMI we initiated a program called ‘Profit Improvement Program.' This program was very successful in bringing distributors into our VMI program as they were financially rewarded for increased sales through VMI. As their sales increased they realized the value of VMI.”
For about 11 years, Hubbell ran its VMI program in-house, with three full-time positions devoted to maintaining and continuing its development. “Database administration, purchasing servers, work stations, doing software updates — all the IT infrastructure-related responsibilities, we had to handle,” Riley says.
Over time, the overhead became unwieldy, and eventually the legacy software system they were using just wasn't keeping up with the evolution of the marketplace, Riley says. So, after more than a decade of managing this very successful process, Hubbell started looking at other options. Between 2004 and 2006, they evaluated several solutions that were proving themselves in the electrical industry, including modules available from their software provider and custom solutions developed by top software companies. The service they chose was a software-as-a-service (SaaS) solution offered by Cincinnati-based Datalliance.
For companies that have built their own VMI systems, the transition from an in-house to an out-sourced solution is always difficult, says Bob Jennings, vice president of sales for Datalliance. “Most people who invented it themselves, they hold it very preciously. It's like, ‘You're telling me my baby's ugly,'” Jennings says. “I give John and people like him a ton of credit. At the time they developed it, this was a smart decision, but now there's a different way. The way they did it was the best way, compared to the alternatives at the time, but now the alternatives have changed. It takes a strong culture to say, ‘Look, we made a good decision then, and if we change, that's a good decision for us now.’ Some organizations can't do that — they say, ‘Why are we dumping what we invented? Let's go pillory guy who did it.’”
The results have been good for Hubbell, Riley says. The company's VMI relationships with distributors had already fostered a closer partnership and more trust between the companies. He's learned to rely on Datalliance's customer service and reporting capabilities, which are far better than what Hubbell's in-house VMI staff was able to provide.
Outsourcing the back-end work to Datalliance has freed Hubbell's VMI staff to do more demand-planning, more smoothing of order points and order quantities, studying demand trends and such. It's also allowed them to focus on further strengthening those distributor relationships. “We talk to them more, almost on a daily basis, rather than waiting for them to do order entry.”
“Usually a distributor keeps four to six weeks in inventory, so there's a four-to-six week window where you see demand in how the distributor orders. We're more agile and in-tune,” Riley adds. “In early fall of '08, our VMI partners' alerts saw (the recession) first from a customer-demand perspective. We found we were more in tune to local market and the depressed demand. There's no more tail-whip. We see that dog.”
Outsourcing the IT side of the VMI program has also freed Riley and his team to look further down the road and try to prepare for the next wave of changes in electronic commerce. In Riley's view, that should be a phase of development where all the data and communication advances that have taken the industry by storm in wave after wave — from all the upgrades in preparation for the Y2K rollover to the emergence of the web as the prefered interface to EDI-enabled e-commerce — begin to consolidate into more powerful tools.
One such consolidation he would like to see would be to have ship-and-debit information incorporated into the EDI 852 point-of-sale document that underlies VMI. “Our distributors (on VMI) daily send an 852 of all the product that moved for that manufacturer for that day. If we add three or four key pieces to the 852, i.e., a quote number, quote date, end user identifier, and a customer purchase order or customer invoice, add that to the line-item detail on 852, no longer would our trading partner have to submit a request for credit. The supplier could, on a monthly or even weekly basis, just send a credit. There's giant inertia around exchanging this data back and forth; it's a major pain point, and it would become a non-issue.”