Framework for Characterizing the Design of Vendor Managed Inventory (VMI) Systems for SMEs
Focus of the Study
The focus of this study is to investigate the sustainability and the limitations of the framework for characterizing the design of VMI systems for small and medium enterprises. The framework used by the suppliers in the VMI of the customers will be studied deeply in this research paper but only the small and medium organizations using VMI for inventory replenishment will be used. The VMI has been implemented particularly in the retailing and apparel industry but only those companies which are small and medium will be concentrated in this research paper. The goal of improved VMI is the reduction in lead times, inventory turns, improved service levels, control of bullwhip effect, reduction is stocks and reduced stock-outs.
Main Issues of the Study
The main issues that this study will cover are the seamless integration of VMI with the supply chain of the customer and the effects of the limitations of e-commerce on VMI in SMEs. The major problem that the SMEs face is that the suppliers are not willing to devote their time and effort on the management of inventory of the SMEs. Usually the SMEs do not have a seamless information system in their organizations which discourages the vendors to interface their VMI system with the system of an SME organization.
For an effective VMI system, the customer should have a system that integrates the transformational activities inside the firm, the distribution of goods and services to the customers via the retailers and wholesalers and the procurement from suppliers. Another issue that the SMEs face is that they cannot afford to invest large reservoirs of money in point to point networks for reliability and security reasons. Therefore if VMI systems are implemented in small or medium enterprises, the systems will not be reliable and secure, unless a lot of investment is made (Binary Spectrum 2009).
CONTEXT OF THE STUDY
The description of VMI as given by Hines et al. in 2000 is the collaborative strategy between the supplier and the customer in order to optimize the exchange of products between the two companies at a minimal cost. Operational management is handled by the suppliers in the VMI system for inventory replenishment which is according to an agreed upon framework of performance targets that are monitored continuously and improved in order to create an environment of continuous update (Hines et al. 2000). The definition presents a mutual commitment by both the supplier and the customer to collaborate.
Since a decade, larger organizations, both in size and investment, have diverted their resources and efforts towards inter-organizational systems and supply chain management in order to increase effectiveness and efficiency. However, the SMEs have been struggling to adopt and get advantages from such systems. Reasons cited traditionally for this struggle were lack of technical capabilities and financial resources. Inter-organizational systems are defined by Morrell and Ezingeard as automated information systems connecting and allowing two or more parties to shares digital resources and data (Morrell and Ezingeard 2002).
To structure the literature review, a tentative model of framework for the VMI in SMEs has been developed. The drivers in the model are effectiveness drivers, efficiency drivers and competitive positioning. The objectives of such collaboration are enhancement of supply chain management and coordination amongst the organizations engaging in trade. The inhibitors in this model are operational, strategic, financial and infrastructural. The enablers, which are of particular importance, for this e-commerce model are of course technology and the organizational culture. These enablers are necessary for seamless running of the e-commerce solution and for the integration of the process of one organization with another.
In todays environment, where the sales are quite stagnant because of the rising levels of unemployment and decreasing household incomes, the manufacturers operate in a market which can be characterized as stagnant. The prices are also reduced by the competitors in the market in order to gain a higher market share, therefore as SME is under constant pressure to reduce the cost of the production. In a market, where the prices are becoming more important to the consumers, small and medium manufacturers find it very hard to survive amongst the giant multinationals. The incentives of implementing a VMI framework described in this paper in small and medium enterprises are mostly in tangible form such as quicker response, reduction in operating cost, reduced paperwork, and improved accuracy and ordering (Morrell and Ezingeard 2002).
The supplier also sees the VMI with the customer as advantageous as the organizations share data and their organizational goals converge. The distributor could also improve its position through automation the repetitive processes and focusing on its role as a distributor. When the vendors are responsible for the inventory management, greater throughput with efficiency could be achieved and purchases could be made with little uncertainty (Morrell and Ezingeard 2002).
AIMS
The aim of this research paper is to provide a framework for characterizing the design of a VMI in SMEs. The objective of the paper is also to contribute to the research community and the SMEs with possible implementations of VMI and the provision of a framework designed for SMEs. The concept of supply chain management and VMI in business and logistics have received a lot of academic literature over the past decade but the SMEs have not yet received importance for implementation of VMIs. The paper will also describe the evolution of the technology from the traditional EDI approach to the new web based RFID approach of VMI (Pramatari 2007). In the past, when EDI was used, there were little opportunities for the SMEs to get involved and benefit from VMI systems. However, the SMEs can now benefit from the low cost of trading information over the internet using e-commerce. The framework to be presented in this paper will enable the SMEs to benefit from the supply chain collaborative practices and the low cost of the underlying technologies.
PROPOSED METHODOLOGY
Research Design
The framework of the VMI system for SMEs will be designed in this paper using the approach of Arbnor and Kovacs (1997 and 2006), which employs both the literature and the empirical data from research in combination with analysis and reasoning. The characteristics will be identified and then the framework will be built for VMI with configurations for SMEs. The VMI systems used by some SMEs will be selected and studied in the initial processes of the research. Through sampling, data will be collected from a number of organizations which fit in the category of SMEs. VMI systems being used by the companies from various sectors of diverse set of industries will be selected excluding the apparel sector which has already been researched a lot before. The main SME entities to be researched are small retailers, grocery stores, bakeries, software houses and workshops.
Data Collection and Analysis
Interviews will be used as the basic method of collecting the data in this research study. The interviews are expected to be formal in nature and each interview is to be to lasted not more than 10 minutes. These interviews will be recorded and transcribed for future references and the data will also be analyzed using these transcripts. The persons who will be interviewed will be responsible for either procurement or for the VMI partnerships with the vendors. Direct observation will also be used as a tool of data collection and used in the research study if necessary. Any patterns visible will be identified in the data gathered from the interviews and the hidden patterns will be identified using data analysis tools such as Run Chart, S-Chart and C-Chart etc. The partnership agreements with the vendors will also be studied for these participating SMEs whenever accessible.
For making the framework design more efficient and effective, the organizations and businesses being studied will also be asked for the missing attributed of the VMI system. The variables such as the number of orders, out of shelf indication, inventory information, expiration dates and product history are usually available in most of the VMI systems. However, these systems are not built for the SMEs. Therefore, the requirements that the SMEs have will also be identified from the research. Some of these distinct requirements include product shelf position, reverse logistics, shelf management, back room inventory and product recall date (Pramatari 2007).
The research is limited to only small and medium enterprises which have a different definition in different contexts. These are organizations whose size is under a certain limit which is defined differently by different authorities. These companies can be labeled as SMEs, if their headcount or turnover falls under a certain limit. SMEs comprise almost 99 percent of the total firms present in the USA and these SMEs employ about 65 million working population (U.S. Census Bereau 2008). European Union has declared the organizations with total headcount between 10 and 250 as SMEs (European Commission 2003) whereas the UK reports 90.3 percent of the firms being SMEs and the comprising of 50 to 249 workers. According to the USA, a business set with the help of a government department is an SME and the headcount can vary between 100 to 500 employees (UNIVERSITY OF STRATHCLYDE LIBRARY 2010).
Therefore only the organizations fulfilling the above criteria will be included in the research and the study. The view that will be presented in the paper will be generalized from the interviews and observation results and no specific examples of the interviewee will be cited, however, some names of the organizations will be used to identify the major points about VMI systems in SMEs. The approach of the study is of designing therefore the focus will be on the design of the new framework for SMEs and not large multinational corporations. The greatest limitation of the study is that there is no practical approach or test in the study. There is no practical test to confirm the success of this model as it is only a theoretical model. Framework will not be tested on any pilot sites because of irrelevance ti the topic and therefore no results will be presented in this paper. The situational factors affecting the output or the result also cannot be observed or found out (Tanskanen, Holmstrom and Talvitie 2009).
The proposed framework that is designed in this study is only for SMEs which want to use VMI as the tool for managing their inventory. This is potentially a big step toward the implementation of VMIs at small and medium firms such as mining firms, grocery stores, tailors, retailers and sport shops.
This study will be a huge contribution in the literature of supply chain and specially procurement in the firms which are small or medium in size. Previous studies are present but most have done studies on large firms and multinational corps. The university will be praised for the unique and original framework contributed in the field of VMI which is a very demanding subject in the 21st Century. Some of the SMEs which are serious about reducing their costs and competing with the larger competitors can pay the university to use the framework in their enterprises. This will not only help the university gain popularity and fame in the VMI field but also develop my skills at a step ahead than my peers. The new framework will surely decrease the costs of the SME which uses it to implement the VMI in collaboration with a partner. The value of the paper is the vertical integration of the firms through sharing of information and designing logistics solutions for the industry.
ETHICAL APPROVAL
The information being collected in this research is from the SME organizations that have implemented VMIs already. It is not known whether the VMI is successful in these organizations or a failure, therefore the SMEs selected is a random sample. These VMI systems in SMEs are not in conflict with any ethical theory or right of anyone. Implementation of VMI required only two organizations to partner and share data in order to reduce their costs. The customer data is not collected in the VMI system therefore there is no ethical approval required from the customers.
The data gathered in the study phase of the research is going to come from the records of the SMEs that are being researched. The authorities will be concerned before the data is used in the study. The data will not be used for the SMEs whose authorities disapprove of reprocessing the data. The observations made will be used in the research without any prior notices to the authorities of the SMEs but no names will be used in the research paper to protect the privacy of the organizations.
Objectives
- Supply Chain Management
- Inter-organizational coordination
Supply Chain Design
- Principles
- Tools
Drivers
- Efficiency Drivers
- Effectiveness Drivers
- Competitive Positioning
Inhibitors
- Strategic
- Operational
- Financial
- Infrastructural
Enablers
- Technological
- Organizational
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