Collaboration Between Retailers
and Vendors in Supply Chain
Management
Bullwhip Effect
• When retailers and vendors do not coordinate
their supply chain management activities,
excess inventory builds up in the system, even
if the retail sales rate for the merchandise is
relatively constant.
• This buildup of inventory in an uncoordinated
channel is called the bullwhip effect.
Bullwhip Effect in Uncoordinated Supply
Chain
Causes of the Bullwhip effect
1. Delays in transmitting orders and receiving
merchandise
• Even when retailers can forecast sales
accurately, there are delays in getting orders
to the vendor and receiving those orders
from the vendor.
• In an uncoordinated supply chain, retailers
might not know how fast they can get the
merchandise, and thus they overorder to
prevent stockouts.
Causes of the Bullwhip effect
2. Ordering in batches
• Rather than generating a number of small
orders, retailers wait and place larger orders
to reduce order processing and
transportation costs and take advantage of
quantity discounts.
Causes of the Bullwhip effect
3. Overreacting to shortages
• When retailers find it difficult to get the
merchandise they want, they begin to play
the shortage game.
• They order more than they need to prevent
stockouts, hoping they will receive a larger
partial shipment.
• So, on average, the vendor ships more than
the retailer really needs.
Benefits of Coordination
• Four approaches for coordinating supply chain
activities, in order of the level of collaboration,
are
1. using EDI;
2. exchanging information;
3. using vendor-managed inventory; and
4. employing collaborative planning,
forecasting, and replenishment.
Using EDI
• The use of EDI to transmit purchase order
information reduces the time it takes for
retailers to place orders and for vendors to
acknowledge the receipt of orders and
communicate delivery information about
those orders.
Sharing Information
• One of the major factors causing excessive
inventory in the supply chain is the inability of
vendors to know what the actual level of retail
sales are.
• Sharing sales data with vendors is an important
first step in improving supply chain efficiency.
• With the sales data, vendors can improve their
sales forecasts, improve production efficiency,
and reduce the need for excessive backup
inventory.
Vendor-Managed Inventory (VMI)
• Vendor-managed inventory (VMI) is an approach for
improving supply chain efficiency in which the
vendor is responsible for maintaining the retailer’s
inventory levels.
• The vendor determines a reorder point—a level of
inventory at which more merchandise is ordered.
• The retailer shares sales and inventory data with the
vendor via EDI.
• When inventory drops to the order point, the vendor
generates the order and delivers the merchandise.
• In ideal conditions, the vendor replenishes
inventories in quantities that meet the retailer’s
immediate demand and reduce stockouts with
minimal inventory.
• In addition to better matching retail demand to
supply, VMI can reduce the vendor’s and the
retailer’s costs.
• Vendor salespeople no longer need to spend time
generating orders on items that are already in the
stores, and their role shifts to selling new items
and maintaining relationships.
• Retail buyers and planners no longer need to
monitor inventory levels and place orders.
Collaborative Planning, Forecasting, and
Replenishment (CPFR)
• CPFR is the sharing of forecasts and related business
information and collaborative planning between
retailers and vendors to improve supply chain
efficiency and product replenishment.
• Although retailers share sales and inventory data when
using a VMI approach, the vendor remains responsible
for managing the inventory.
• In contrast, CPFR is a more advanced form of retailervendor
collaboration that involves sharing proprietary
information such as business strategies, promotion
plans, new product developments and introductions,
production schedules, and lead-time information.