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JOURNAL OF BUSINESS LOGISTICS, Vol. 25, No.

1, 2004

101

SUPPLY CHAIN INFORMATION SHARING IN A


VENDOR MANAGED INVENTORY PARTNERSHIP
by
Andres Angulo
J.B. Hunt Transport, Inc.
Heather Nachtmann
University of Arkansas
and
Matthew A. Waller
University of Arkansas
Automatic replenishment programs (ARPs) represent a type of inventory management designed
to improve efficiency across the supply chain (Daugherty, Myers, and Autry 1999; Sabath, Autry, and
Daugherty 2001). ARP Programs such as Continuous Replenishment Planning (CRP), Efficient
Consumer Response (ECR), Quick Response (QR), and Vendor-Managed Inventory (VMI) can
be defined as partnership initiatives based on information sharing among the members in attempts to
match supply and demand as closely as possible. VMI, one of the most widely discussed initiatives
for improving multi-firm supply chain efficiency (Waller, Johnson, and Davis 1999), involves the vendor making the replenishment decision for products supplied to a customer based on specific inventory and supply chain policies (Lee and Whang 1998; Simchi-Levi, Kaminsky, and Simchi-Levi 2000).
There are a number of well publicized examples of VMI initiatives (see Cachon and Fisher (1997)
regarding Campbell Soup and Harvard Business School Case, Barilla SpA (1994)).
Information sharing between supply chain members is necessary for implementing VMI.
However, information sharing in a VMI partnership raises a number of issues: different incentives and
performance measures exist between the vendor and the customer (Lee and Whang 1998; Waller, Johnson, and Davis 1999); issues also arise regarding confidentiality (Lee and Whang 1998), trust (Simchi-Levi, Kaminsky, and Simchi-Levi 2000; Waller, Johnson, and Davis 1999), technology
investments and expenses (Waller, Johnson, and Davis 1999), inventory ownership (Simchi-Levi,
Kaminsky, and Simchi-Levi 2000), and antitrust regulations (Lee and Whang 1998). When supply
chain members overcome these issues and jointly define the information to be shared in establishing
a VMI partnership, the vendor is faced with the challenge of using that information effectively
(Lee and Whang 1998; Metters 1997; Silver, Pyke, and Peterson 1998;). The vendors

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responsibility for managing the shared information generally resides solely with a VMI team, which
consists of a person or a group of people (usually associated with the sales or logistics functions) who
use that information to make the replenishment decisions between the vendors stocking point (a plant
or a DC) and the customers receiving point (a plant, DC, retail outlet, etc.). A recent case study of a
multi-billion dollar retailer showed that inventory record inaccuracy amounted to 10% of current
profits (Raman, DeHoratius, and Ton 2001).
The vendors VMI team faces a number of challenges when gathering information. One challenge is to ensure that information is available when it is needed to make decisions (henceforth referred
to as information delay). Another challenge is ensuring that the information obtained is reliable (henceforth referred to as information accuracy) to make the correct decisions. There are other challenges
such as completeness of information; however, we focus on information delay and accuracy. Further
explained, information delay refers to the wait time that shared information experiences before it is
used by a vendors internal supply chain functions. This situation may occur as a result of the vendors
inadequate communication structure established for the VMI partnership. Information accuracy
refers to the error in information caused by the customers poor inventory integrity and/or poor
planning and forecasting practices (Tibben-Lembke and Amato 2001). While the vendor may
directly control the delay of information, the customer generally has control over the accuracy.
Using obsolete and inaccurate information may create potential problems down the supply chain, such
as rework, excess cost, and process inefficiencies. An empirical field study found that accuracy in information sharing is perceived as being more important by the buying organization and timeliness is more
important to the supplier (Whipple, Frankel, and Daugherty 2002).
Types of information that can be shared between supply chain partners in a VMI partnership
include inventory levels and position, sales data and forecasts, order status, production and delivery
schedules and capacity, and performance metrics (Lee and Whang 1998). Sharing information
yields many benefits to supply chain members (Frohlich and Westbrook 2001; Lee and Whang
1998; Metters 1997; Stank, Keller, and Daugherty 2001; Waller, Johnson, and Davis 1999). According to the literature, the benefits of a VMI partnership include the following:
Reduced costs due to better resource utilization for production and transportation (Waller,
Johnson, and Davis 1999),
Improved service levels due to better coordination of replenishment orders (Daugherty,
Myers, and Autry 1999; Simchi-Levi, Kaminsky, and Simchi-Levi 2000; Waller, Johnson, and
Davis 1999),
Reduced lead times and increased inventory turns (Daugherty, Myers, and Autry 1999;
Simchi-Levi, Kaminsky, and Simchi-Levi 2000; Waller, Johnson, and Davis 1999),
Reduced inventory stockouts by increasing inventory visibility (Daugherty, Myers, and
Autry 1999),
Higher selling space productivity obtained by optimizing inventory (Daugherty, Myers, and
Autry 1999),

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Control of the bullwhip effect, i.e. the distortion and amplification of demand information
as it moves up the supply chain (Chen et al. 2000; Lee, Padmanabhan, and Whang 1997a; Lee,
Padmanabhan, and Whang 1997b; Lee and Whang 1998; Metters 1997),
Solidified customer loyalty through development of a long-term trustworthy relationship
(Vergin and Barr 1999; Xu, Dong, and Evers 2001), and
Improvement of overall information system capabilities (Daugherty, Myers, and Autry 1999).
While many benefits have been identified in the literature, there are a number of challenges that
exist in practice that may potentially reduce benefits. Two of the challenges of information sharing
include inaccurate inventory information and delays in replenishment decisions. This research
examines the effects of using inaccurate inventory information and delays in replenishment decisions
on inventory levels and fill rates, among other performance measures. Delays in replenishment
decisions can be due to delays in information transmission, information systems updating, or simply
managerial delay. This research is motivated by the recognized need of practitioners to confirm the
potential benefits derived from supply chain partnership programs (Daugherty, Myers, and
Autry 1999).
METHODOLOGY
The supply chain examined here consists of four echelons: a Manufacturing Plant (Plant),
Vendor Distribution Center (Vendor DC), Retailer Distribution Center (Retailer DC), and Retailer Outlet Store (Outlet). All echelons of the supply chain operate under an (R, S) inventory policy, where
R is the review interval and S is the order-up-to-level.
Demand and lead time are the stochastic elements of the simulation model. The value of S is
computed on a bi-weekly basis. The parameters defined for the simulation model are R (1 day) and a
service factor, z , equal to 2.
Manufacturing
The Plant manufactures and distributes the product to the Vendor DC and to the Retailer DC.
However, the Plant is not the only sourcing point of product for the Retailer DC. The Vendor DC also
ships product to the Retailer DC. When the inventory at the Retailer DC needs to be replenished, the
system assigns a replenishment order from either the Plant or the Vendor DC. The probability to assign
the order to the Plant is the same (50%) as the probability to assign the order to the Vendor DC (50%).
The selection rule for the sourcing point of the Retailer DC was chosen to represent a scenario
with more than one shipping point.
If a Retailer DC replenishment order Q has been assigned to the Vendor DC but the DC cannot
supply such quantity in full, the system will check for existence of Q units in the Plant, allowing it to
ship the product (given that it is available). The Plant begins production immediately after the need
for the additional inventory is recognized. The Vendor DC receives product shipped from the Plant
to replenish its inventory. Similar to the Plant, the Vendor DC can ship a Retailer DC replenishment

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quantity (Q) that has been assigned to the Plant when the Plant cannot fulfill the order completely. The
Retailer DC receives product shipped from either the Plant or the DC and replenishes product to the
Outlet. The Outlet is the point of origin for product demand and receives product shipped exclusively
from the Retailer DC.
Products are manufactured at the Plant using either a Time-Based manufacturing policy
(TBMP) or a Batch-Based manufacturing policy (BBMP). A TBMP implies that when there is a need
to make the product, the line will run for the entire day, and in multiples of days, until the required
quantity is manufactured. A BBMP implies that the line produces only as much product as needed, in
multiples of production batches, to fulfill a customer or replenishment order.
Shipping
Two shipping policies are used in the model: a Time-Based shipping policy (TBSP) and a
Quantity-Based shipping policy (QBSP). A TBSP implies that products are shipped from a shipping
point (Plant, Vendor DC, or Retailer DC) at regular time intervals regardless of the quantity shipped
(assuming a quantity greater than zero). A QBSP implies that products are shipped only when an economical quantity is reached (Centikaya and Lee 2000). In this research, the economical quantity is
defined as one truckload (TL). If the system is operating under a QBSP and the replenishment
quantity (Q) is greater than but not a multiple of a TL, the product is shipped in multiples of TL and
the remaining quantity is held in storage and shipped when the accumulated quantity reaches a TL.
Model
The primary analysis tool chosen for this research is discrete-event simulation using Arena simulation software. The model was run for 15 replications of 1,500 days each using a warm-up period
of 180 days to reduce some of the initialization bias. The company providing the data earned over
twenty billon dollars in sales, employed over 100,000 people, and operated more than 100 plants in
2001. It has 21 distribution centers and approximately 50 contracted storage facilities. Its more
than 5,000 different products can be sent from plants to the distribution centers, contracted storages,
or directly to the customers. Company data were provided in multiples of cases where a single case
contains 40 units.
Stationary and nonstationary Poisson processes are used to represent the arrival of customers at
the Outlet. Stationary demand has an average level that is constant whereas nonstationary demand has
an average that changes over time. Analysis of the data revealed that the size of each order at the Outlet followed a Gamma distribution with  = 293 cases and  = 1.05 (Keaton 1995; Tyworth, Guo, and
Ganeshan 1996). This company provided demand information, manufacturing and logistics information, and other related information. Most of the items this company sells are sold through grocers,
mass merchants, and wholesale clubs in the frozen and refrigerated departments of the stores.
If Outlet inventory is greater than the customer demand, then demand is fulfilled and sales and
Outlet inventory information is updated. If Outlet inventory is less than the demand, but greater than

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zero, the demand is satisfied with the available inventory and partial sales and Outlet inventory information is updated. Excess demand is not backlogged at the Outlet level because the product is a food
item. In this case, consumers typically switch to another item or do not purchase in the category that
trip or go to another store when stockouts occur.
Outlet inventory must be replenished exclusively from the Retailer DC. The vendor checks on
a daily basis the Outlet inventory position (the sum of on-hand Outlet inventory plus the inventory in
transit to the Outlet). If the inventory position is greater than the current Outlet order-up-to-level (S),
then the vendor does nothing. If it is less, the vendor determines a replenishment quantity (Q) equal
to (S Outlet inventory + Inventory in transit). The vendor then checks the inventory at the Retailer
DC. If Retailer DC inventory is zero, then the vendor does nothing. If Retailer DC inventory is greater
than zero but less than Q, then Q is reassigned to the available quantity. If Retailer DC inventory is
greater than or equal to Q, demand is fulfilled. The vendor evaluates the shipping policy in place. If
a QBSP is in place, then the vendor verifies that there is enough accumulated inventory to fill one or
more trucks completely. If so, product is shipped and excess quantity is accumulated for future
shipments. If the accumulated quantity is not large enough to fill a truck, then no shipments occur that
day. Upon shipment of the product, Retailer DC inventory and inventory in transit are updated.
The same basic daily process used to replenish the Outlet is used to replenish the Retailer DC,
except that the Retailer DC can be replenished from either the Plant or the Vendor DC. Similarly, the
Vendor DC can fulfill orders entered to the Plant, with the corresponding costs. When inventory is zero
at either the Vendor DC or at the Plant, and Q cannot be fulfilled immediately, then a production order
enters a queue and waits for production. Once product is manufactured, Q is fulfilled from the
Plant.
Performance Measures
We measured performance by average inventory levels, fill rates, and various cost calculations.
In addition to this, the average cost per unit of inventory was calculated based on system-wide performance. This measure takes into account all costs incurred in the process of manufacturing, storing, and distributing the product. It is for this reason that the cost per unit value estimated depends on
the weight that the systems cost structure gives to each cost component. To evaluate average cost, we
must make a number of additional assumptions. These assumptions do not affect the estimates of
inventory levels and fill rates. A realistic but simple logistics cost structure is chosen based on a sale
cost of $1.00 per unit. To calculate the average cost per unit, the following cost components are used:
average shortage cost is 20% over the sale cost of the product, which reflects the cost of lost sale opportunities (customers may buy a different brand to supply their needs) and loss of goodwill; average carrying cost is 20% over the sale cost of the product, which reflects the cost of storing and handling the
product; average manufacturing cost is $0.20 per unit; average transportation cost is $0.10 per unit;
average penalty cost associated with changing shipping points is $0.20 per unit; and setup cost is $100
per production run.

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Information Sharing
Shared information between the retailer and the vendor includes daily demand and shipment data
at the Outlet and Retailer DC, respectively; daily inventory position at the Outlet and Retailer DC; and
periodic forecast at the Outlet level. Inventory position and demand data resulting from the previous
day activities are gathered on a daily basis by the VMI team. These data are transmitted upstream to
the vendors supply chain and used to make decisions that affect manufacturing, shipping, and
inventory processes.
Sales forecast is also shared between the retailer and the vendor. Forecast is used in place of average demand in the order-up-to-level calculation to determine inventory levels. Forecast is simulated
in the model as follows. First, the base case scenario (time-based shipping policy, batch-based
manufacturing policy, perfect information, and no delays) is run for 15 replications of 1,500 days for
each type of demand. Outlet daily demand is saved to a file throughout the simulation experiment.
Upon completion of the experiment, the average Outlet daily demand across replications is computed,
resulting in 1,500 values equivalent to the 1,500 days simulated. The results are batched into 100
groups of 15 consecutive days and the average for each group is computed again. The resulting
100 values are assumed as forecasts, and are entered in each simulation experiment as an array
of 100 expressions that are used every 15-day period in the S calculation instead of past demand.
Two levels of information delay are studied, including zero and two days. For example, if the current S at the Outlet is 200,000 units, and daily sales on the 20th day are 50,000 units, the correct replenishment quantity would be 50,000 units assuming no inventory is in transit. If a delay of two days were
to be induced, the replenishment quantity would be based on sales of the 18th day and not on sales of
the 20th day. If sales on the 18th day were 35,000 units, then the vendor would set the replenishment
quantity to 35,000 units.
Information inaccuracy is induced in the simulation model by multiplying the true values of
inventory and sales (in the case of the Outlet) and inventory and shipment quantity (in the case of the
retailer) by a random number generated from a uniform distribution in the range 0.95 to 1.05. The use
of a uniform distribution provides an error factor with a controlled range (+/- 5%) with any value in
between having equal probability to occur, thus avoiding a series of extreme values that could
result in misleading findings. The levels of these factors are shown in Table 1.

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TABLE 1
MODEL FACTORS
Factors
Shipping
Policy (SP)

Retailer Inf.
Accuracy
(RIA)

Manufacturing
Policy (MP)

Shared
Information (SI)

TBMP
BBMP

Inventory/Sales
100%
Inventory/Forecast 95%

Outlet Inf.
Accuracy (OIA)

Information
Delay (ID)

100%
95%

0 days
2 days

Levels
TBSP
QBSP

RESULTS
An analysis of variance (ANOVA) was performed to test the significance of the factors in the
experiments. The experiments were performed separately for each demand type; therefore, the
experimental results under stationary and nonstationary demand are presented separately in Table 2.
Only factors that significantly affect the performance measures at the 0.05 level are presented in this
paper. More important than the significance of the effects are the magnitude and direction of the effects
as the levels of the factors change. Tables 3 and 4 show the magnitude and direction of the effect of
the various factors on the performance measures for stationary and nonstationary demand respectively.
Factor levels I and II as referred to in Tables 3 and 4 can be found in Table 1.
Table 2 presents the performance measures that are significantly affected by the model factors
under conditions of stationary and nonstationary demand. Main factor effects are located in the
diagonal cells of the table matrices. Any significant interaction effects can be found in the remaining
cells of the table. For example, observation of Cell SP/SP-S shows that the performance measures for
stationary demand that are significantly affected by changes in Shipping Policy (SP) are VAI (Vendor Average Inventory), OFR (Outlet Fill Rate), RFR (Retail Distribution Center Fill Rate), VFR (Vendor Fill Rate), and AC (Average Cost). Observation of Cell SP/ID-S (Shipping Policy/Information
Delay Stationary) for stationary demand indicates a significant interaction between Shipping
Policy (SP) and Information Delay (ID) on VAI (Vendor Average Inventory), RFR (Retailer Fill Rate),
VFR (Vendor Fill Rate), and AC (Average Cost) for this demand type. Similar results for nonstationary
demand are located on the right side of Table 2. Observation of Cell SP/SP-N (Shipping Policy/Shipping Policy Nonstationary) shows that SP (Shipping Policy) significantly affects RAI (Retailer Average Inventory), VAI (Vendor Average Inventory), RFR (Retailer Fill Rate), VFR (Vendor Fill Rate),
and AC (Average Cost) for nonstationary demand.

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TABLE 2
SIGNIFICANT MAIN AND INTERACTIVE FACTOR EFFECTS
Stationary Demand (S)
SP-S MP-S SI-S RIA-S OIA-S
SP VAI
OFR
RFR
VFR
AC
VAI
MP
AC
SI

RIA
OIA
ID

OFR

Nonstationary Demand (N)


SP-N MP-N SI-N RIA-N OIA-N
VFR VAI
RAI
VAI
RFR
VFR
AC
RAI
VAI
AC
RAI
OFR
VAI
OFR
VFR
AC
VAI

ID-S
VAI
RFR
VFR
AC

RAI
VAI
OFR
RFR
VFR
AC

ID-N
RFR
VFR
AC

RAI
VAI
RAI
VAI

VAI
VFR
VAI
RAI
VAI
RFR
VFR
AC

There are a few primary observations from Table 2 we should point out before looking into more
detail regarding the directions and magnitudes of the effects in the following tables. First, sharing the
forecast has a more pervasive impact on performance measures under nonstationary demand than it
does under stationary demand. This is because the demand is more equivocal in the nonstationary cases
because the mean is changing, making the additional analysis associated with forecasting more
valuable. In the case of stationary demand, the mean is constant and so using the average demand in
the inventory calculations is almost as good as using a more sophisticated forecast.
Also notice from Table 2 that overall information delay affected a large number of measures of
performance, whereas, information accuracy did not. In the stationary demand case, information delay
affected all six of the performance measures but information accuracy (both RIA Retail Distribution Center Information Accuracy and OIA Outlet Information Accuracy) did not affect any measures of performance. In fact, information accuracy only affected performance measures in the
nonstationary demand case and, in that situation, it only had a significant impact on supplier performance, not retailer performance.
Table 3 contains the performance measures for stationary demand that are significantly affected
by level changes of the model factors. All five performance measures are significantly affected by

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changing information delay (ID) from zero to two days - viz., information delay caused average inventory levels to increase at the retailer and vendor; fill rates to decrease at the outlet, retail distribution
center, and vendor; and overall average cost to increase. While all of these changes are statistically
significant, the greatest impact was on the vendor average inventory level (VAI), causing an increase
of 76.69%. This is interesting in view of the fact that order fill rates only decrease slightly. The reason for this is that information delay (ID) causes an increase in uncertainty, requiring higher levels of
safety stock to achieve nearly the same fill rates. The uncertainty caused by the information delay
seems to be amplified as it is propogated up the supply chain, resulting in the largest impact on the supplier. The shipping policy (SP) has the next most significant effect on performance under stationary
demand with significant effects on VAI (Vendor Average Inventory), OFR (Outlet Fill Rate), RFR
(Retailer Fill Rate), VFR (Vendor Fill Rate), and AC (Average Cost). The remaining significant effects
under stationary demand are presented in Table 3.
TABLE 3
SUMMARY OF MAIN FACTORS BY RESPONSE - STATIONARY
Performance
Measures

Model
Factors

Level
I

Level
II

% Change

RAI

ID

1,546,419

1,834,866

18.65

VAI

SP
MP
ID

1,155,819
1,206,744
843,092

1,176,975
1,126,051
1,489,702

1.83
-6.69
76.69

OFR

SP
SI
ID

99.73
99.67
99.97

99.69
99.75
99.45

-0.04
0.08
-0.52

RFR

SP
ID

99.81
98.18

95.26
96.89

-4.57
-1.32

VFR

SP
ID

99.50
99.96

99.99
99.53

0.50
-0.43

AC

SP
MP
ID

0.1712
0.1680
0.1506

0.1592
0.1624
0.1798

-6.99
-3.36
19.40

Table 4 contains the performance measures for nonstationary demand that are significantly
affected by level changes of the model factors. Notice that sharing forecast information greatly
improved the outlet fill rate - a 41.64% improvement. At the same time, Table 4 reveals that average
inventories increased throughout the supply chain when forecasts were shared. The forecasts
revealed that much more inventory was needed to achieve the desired fill rates. The fact that demand
was nonstationary meant that simply using average sales in calculating the order-up-to level was insuf-

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ficient. Table 4 also shows that inaccurate information from the retail distribution center had a
large impact on the vendors average inventory level. Information inaccuracy coupled with nonstationary demand causes even higher uncertainty, requiring higher levels of safety stock to achieve the
target service levels. Information delay had the same impact as it did with the stationary demand with
the exception of how it impacted the vendors average inventory level. With nonstationary demand,
information delay caused the vendors average inventory level to decrease. Notice that it caused the
vendors fill rate to decrease as well. One reason could be that the nonstationarity coupled with the
information delay resulted in a lack of safety stock. An additional possibility could be that as the mean
is increasing, the information delay causes the forecast to be even further below what it should be, causing cycle stock to decrease as a result of lower order-up-to levels. All of the performance measures
excluding outlet fill rate (OFR) are significantly affected by changes in shipping policy (SP) and information delay (ID). The magnitude and direction of all significant effects under nonstationary
demand are detailed in Table 4.
TABLE 4
SUMMARY OF MAIN FACTORS BY RESPONSE NONSTATIONARY
Performance
Measures

Model
Factors

Level
I

Level
II

% Change

RAI

SP
MP
SI
ID

2,852,638
2,819,016
2,627,234
2,732,684

2,913,531
2,947,153
3,138,934
3,033,484

2.13
4.55
19.48
11.01

VAI

SP
MP
SI
RIA
ID

3,943,903
3,895,097
3,656,209
4,152,631
4,502,866

4,178,263
4,227,069
4,465,956
7,992,396
3,619,300

5.94
8.52
22.15
92.47
-19.62

OFR

SI

64.48

91.32

41.64

RFR

SP
ID

96.79
92.77

86.77
90.78

-10.35
-2.14

VFR

SP
SI
ID

94.27
97.20
97.92

99.79
96.86
96.14

5.85
-0.35
-1.82

AC

SP
MP
SI
ID

0.2049
0.1930
0.1926
0.1846

0.1758
0.1877
0.1881
0.1962

-14.19
-2.76
-2.32
6.30

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A portion of the analysis was repeated to examine the effects of production constraints and storage capacity constraints at the outlet level on the performance measures. The factor levels for each of
the selected eight experiments are presented in Table A1 in the Appendix. Tables A2 and A3 in the
Appendix contain the results of the original uncapacitated (U) and post-analysis capacitated (C) experiments for stationary and nonstationary demand respectively. Observation of the capacity-analysis
results shows that enforcing capacity constraints produced a few notable results. Capacity constraints decreased retailer average inventory (RAI) of both stationary and nonstationary demand for
all experiments except Experiment 1 for nonstationary demand. This was at the cost of stockouts at
the outlet level. Outlet fill rate decreased for both stationary and nonstationary demand in all experiments. The additional stockouts at the outlet level probably resulted in additional uncertainty propagation, making more safety stock required upstream.
CONCLUSIONS
There are three primary implications of this research: (1) retailers should not let information inaccuracy slow them down in terms of VMI implementation, but suppliers may want to verify the
accuracy of the information from the retailers; (2) retailers should carefully audit the replenishment
processes of VMI suppliers to ensure they will be using shared information in a timely manner; and
(3) sharing forecasts should be implemented first on items with increasing or decreasing mean
demand rates (nonstationary demand in general).
Information Accuracy
It is widely known that retailers have numerous data errors even when their stores have automated
scanning of bar codes, automated receiving, perpetual inventory systems, and automatic replenishment systems (Raman, DeHoratius, and Ton 2001). These inaccuracies can cost retailers as much as
10% of their profit (Raman, DeHoratius, and Ton 2001). So while we are not suggesting that retail
information inaccuracies should be ignored, we are suggesting that VMI may still be beneficial even
if there are some inaccuracies in information. In the stationary demand case, information accuracy
(both RIA Retailer Distribution Center Information Accuracy and OIA Outlet Information
Accuracy) did not affect any measures of performance. In fact, information accuracy only affected
performance measures in the nonstationary demand case and in that situation, it only had a significant
impact on supplier performance, not retailer performance. So while retailers may not want to let information inaccuracy slow them down in terms of VMI implementation, suppliers may want to verify
the accuracy of the information since it is more likely to have a negative impact on them, albeit only
in nonstationary demand situations.
Obviously, if the inaccuracies are too large or not corrected often enough, then they can become
problems for both retailers and suppliers. A retailer would be aware of such gross inaccuracies
whereas a supplier may not be, thereby creating difficulties for the supplier. The suppliers ability to
audit the retailers information accuracy requires the cooperation of the retailer to some extent. If the
retailer is aware of the magnitude of the benefit and the level of interest of the supplier, then the retailer

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may be more willing to cooperate. Even if the supplier is willing to provide the labor for the audit, the
supplier still needs the retailer to provide access to the outlets and distribution centers. However, some
retailers may keep track of their accuracy levels over time, making it relatively accessable.
Information Delay
The second key implication of this study is that retailers should carefully audit the replenishment
processes of VMI suppliers to ensure they are using shared information in a timely manner. As
shown in Table 2, information delay affected all measures of performance and had significant interaction effects with almost all of the other factors. Information delay can occur in a number of areas,
including in the retailers information systems as well as the suppliers business processes and
information systems. A retailer that updates information systems daily imputes a longer delay than
one that updates information systems hourly. This information must then be transmitted to the supplier. Therefore, if transmissions are daily versus hourly, then there will be longer delays imputed to
the system. Once suppliers receive this information, there may be a delay in how long it takes them
to analyze the information to make replenishment decisions. One challenge associated with auditing
a suppliers fulfillment process is that many managers do not have a good understanding of their own
companys order fulfillment process (Shapiro, Rangan, and Sviokla 1992). However, the audit may
result in an overall improvement of the process that have many benefits that go beyond VMI (Waller,
Woolsey, and Seaker 1995).
The retailer cannot simply observe when the shipment arrives at the distribution center to
determine the level of delay because many times shipments arrive based on schedules that are pre-set.
For example, a particular distribution center may have a set schedule to receive a truckload from a specific supplier every Wednesday. Just because the shipment arrives on time is not unequivocal evidence
that there is no significant delay in the use of information. If the supplier has to commit the shipment
quantity by Tuesday morning based on information from the previous Friday morning, then there is
a four day delay. In that case, the shipment may still be on time but the decision was delayed. On the
other hand, if the commitment is based upon Tuesday morning information, then no delay occured.
If a set inventory policy is in place, such as an order-up-to level, then the retailer can infer when
the decision was made based upon how much was shipped. Suppose the order-up-to level is 100 cases
and that the retailers inventory position was 90 cases on Friday morning and 80 cases on Tuesday
morning. If the shipment quantity of that particular item is equal to ten cases, then it can be inferred
that the delay was four days; whereas, if the quantity shipped is 20 cases, then it can be inferred that
there was no delay.
A similar approach can be used if a reorder point system is used. Suppose that on Friday morning 30 items had hit their reorder points and on Tuesday morning 35 items had hit their reorder points.
Then if the supplier ships 30 items in the truckload, it can be inferred that there was a delay. Other
methods may be developed by the retailer to detect information delay; however, it is critical for the
retailer and the supplier to agree upon a particular replenishment policy so that the retailer can
monitor information delay.

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113

Information Sharing
The third key implication of this research is that sharing forecasts should be emphasized on items
with nonstationary demand rates such as new items, items facing new competitors, seasonal items,
and items that are often promoted. It is not surprising that sharing forecasts of such items would be
beneficial. What is interesting is that it had a very significant improvement on the outlet fill rate
(41.64%). This is a great incentive for sharing forecasts since stockouts at the outlet level can be the
most costly.
If stockouts occur at the distribution center level but do not result in outlet level stockouts, then
the consumer is not affected. However, when stockouts occur at the store level, consumers can
take many different actions, some of which are very costly, such as when consumers leave the
store, shop at the store less frequently, or stop shopping at that particular store altogether. Certain items
tend to have more serious consumer reactions to stockouts than other items. For example, when a store
is out of a destination item, such as baby formula, consumers may go to another store. For impulse
items, such as a particular type of candy bar, consumers may not even be aware of the stockout since
they did not specifically make a trip to the store for that item. Thus, retailers may want to focus sharing forecasts with suppliers whose items are destination items or items with high brand loyalty, that
have nonstationary demand.
Shipping Policies
Differences in shipping policies impact the supply chain performance. This means that vendors
under a VMI partnership should pay attention to their distribution strategies. The time based shipping
policy resulted in slightly lower inventory levels but also resulted in higher fill rates at the retail distribution center level. However, the vendor fill rate was better with the quantity based shipping
policy. The reason for this is that the quantity based shipping policy requires target quantities be
reached before any product is shipped, giving the vendor more time to react. The time based shipping
policy keeps the supplier in stock more consistently because product is shipped at regular intervals
without any thresholds having to be crossed. However, in both the stationary demand and nonstationary
demand cases, average cost is lower when quantity based shipping policies are used since the quantity based shipping policies have better transportation utilization and, therefore, lower annual transportation costs.
LIMITATIONS AND FUTURE RESEARCH
Our research assumed that the outlets and the distribution centers used periodic review inventory policies. As stated earlier, this means that there is a fixed review interval and the order quantity
is the difference between the target inventory position and the actual inventory position at a review
period. This seemed more appropriate than using a pure continuous review model because retailers
cannot afford to ship products to their outlets every time a reorder point is hit on one of their thousands
of items. Furthermore, the retailers need to schedule labor for shipping and receiving, making a pure

114

ANGULO, NACHTMANN, AND WALLER

continuous review model impractical. However, many retailers use a variety of hybrid replenishment
processes. For example, they may use a periodic review model with a reorder point. This process
involves reviewing the inventory positions of a variety of items at the review interval but only
placing orders on items that have hit their reorder points. The amount that is ordered is then a multiple
of the case pack quantity, up to some maximum level. If a truck is not filled, then other items may be
ordered as well. This is just one example of a replenishment process that may be used in practice by
a retailer. One difficulty in modeling the replenishment process just described is that it involves introducing many additional variables that may cloud the real issues of interest. In addition, this requires
many more assumptions that may be unique to particular retailers at specific points in time. This is an
area of future research, not only in a VMI setting, but also in a more general setting including a
single node.
One other limitation of this research is that we viewed the store as a single node. In reality, there
are cases where inventory is held in the back of the store, or in multiple departments within the same
outlet. There is very little published research on outlet level inventory management; yet it is difficult
to manage. Other limitations of this research that are opportunities for future research include the
impact of promotional activity, new items or items that are being discontinued, product substitution
during stockouts, and quantity discounts.
Based upon the experience and research of the authors, one of the most promising areas of future
research is how suppliers can take information from their VMI processes and utilize them effectively
upstream in their own business processes. Many suppliers who are engaged in VMI with retailers seem
to be falling short in terms of using that information themselves. There are two key sets of research
questions in this regard. The first one is the following: How much VMI volume must a supplier have
in order for the information to be truly valuable in terms of their own upstream business processes?
The more retailers a supplier has on VMI, the more valuable the information to the suppliers
upstream business processes.
But even if all of a suppliers retailers are on VMI, how can the supplier replenish the retailers
to make all participants better off? This is the second key question regarding the suppliers upstream
business processes. Theoretically, the supplier could replenish retailers such that the demand they face
is smoothed out, requiring less safety stock and better fill rates. The lower inventory levels reduce the
suppliers costs and the higher fill rates make the retailers better off. This has been a key concept within
VMI for some time; however, it seems to be more difficult to implement than initially thought.
New business processes are needed to allow suppliers to take advantage of the decision making authority VMI allows and the additional demand information it provides.
Another area of future research is the role of assortment decisions within a VMI context.
Replenishment decisions affect assortment decisions, and assortment decisions should be taken
into account in replenishment decisions (Stassen and Waller 2002). If more frequent deliveries are
made to the store, then the amount of cycle stock in the store is reduced, allowing for additional space
for other items on the shelf. This may be necessary if several new items are being introduced without
deleting any existing items. Similarly, some cross docking operations require more safety stock at the

JOURNAL OF BUSINESS LOGISTICS, Vol. 25, No. 1, 2004

115

store level due to the lack of buffer at the distribution center. In those cases, adding additional items
without deleting existing items can cause an increase in stockouts at the store level. Business
processes are needed to integrate assortment and replenishment decisions.
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ABOUT THE AUTHORS


Andres Angulo is a Sr. Engineering Consultant at J.B. Hunt Transport, Inc. He received his BS
and MS in Industrial Engineering from the University of Arkansas. His background includes five years
of experience in the chemical industry in the areas of technical sales, marine logistics, and production
planning. His engineering interests include application of optimization and discrete-event simulation
tools to supply chain management problems.
Heather Nachtmann is an Assistant Professor of Industrial Engineering at the University of
Arkansas. She received her Ph.D. in Industrial Engineering from the University of Pittsburgh. Her
research interests include supply chain management, economic decision analysis, and engineering valuation. She is a member of AACE International, IIE, and INFORMS.
Matthew A. Waller is Associate Professor, Sam M. Walton College of Business Administration,
University of Arkansas. He received a BS (economics), summa cum laude, from the University of Missouri, and a MS (management science) and Ph.D. (business logistics) from The Pennsylvania State
University.
His articles have appeared in the Journal of Business Logistics, Decision Sciences, Journal of
the Operational Research Society, and other journals.

118

ANGULO, NACHTMANN, AND WALLER

APPENDIX
TABLE A1
CAPACITY-ANALYSIS EXPERIMENTAL DESIGN
Exp

SP

MP

SI

RIA

OIA

ID

1
2
3
4
5
6
7
8

QBSP
TBSP
QBSP
TBSP
QBSP
TBSP
QBSP
TBSP

BBMP
BBMP
TBMP
TBMP
BBMP
BBMP
TBMP
TBMP

Inv/Sales
Inv/Sales
Inv/Sales
Inv/Sales
Inv/Fcst
Inv/Fcst
Inv/Fcst
Inv/Fcst

100
95
95
100
100
95
95
100

100
95
100
95
95
100
95
100

2
2
0
0
0
0
2
2

JOURNAL OF BUSINESS LOGISTICS, Vol. 25, No. 1, 2004

119

TABLE A2
CAPACITY-ANALYSIS RESULTS - STATIONARY
Exp

Cap

RAI

VAI

OFR

U
C
% Chg

1,813,979
1,767,776
-2.61

1,438,563
4,002,378
64.06

99.36
99.10
-0.26

93.97
94.00
0.03

99.98
99.96
-0.02

0.1668
0.1618
-3.09

U
C
% Chg

1,831,824
1,778,945
-2.97

1,450,965
1,875,749
22.65

99.35
99.23
-0.12

99.66
99.67
0.01

99.46
99.17
-0.29

0.1865
0.1784
-4.55

U
C
% Chg

1,537,542
1,428,421
-7.64

914,504
952,558
3.99

99.97
99.95
-0.02

96.55
96.71
0.16

100.00
99.99
-0.01

0.1508
0.1520
0.78

U
C
% Chg

1,562,401
1,434,262
-8.93

860,529
902,276
4.63

99.97
99.96
-0.01

100.00
100.00
0.00

99.91
99.92
0.01

0.1566
0.1546
-1.27

U
C
% Chg

1,540,520
1,433,170
-7.49

813,195
848,252
4.13

99.96
99.93
-0.03

95.67
95.99
0.33

99.98
100.00
0.02

0.1465
0.1472
0.50

U
C
% Chg

1,550,721
1,423,461
-8.94

789,978
823,540
4.08

99.98
99.93
-0.05

100.00
100.00
0.00

99.93
99.96
0.03

0.1481
0.1509
1.87

U
C
% Chg

1,844,359
1,777,457
-3.76

1,550,829
7,691,829
79.84

99.54
99.18
-0.36

94.01
94.23
0.23

99.96
99.98
0.02

0.1716
0.1658
-3.50

U
C

1,856,286
1,777,352

1,512,828
1,922,650

99.60
99.19

99.63
99.70

98.61
98.89

0.1952
0.1885

-4.44

21.32

-0.42

0.07

0.28

-3.53

% Chg

RFR

VFR

AC

120

ANGULO, NACHTMANN, AND WALLER

TABLE A3
CAPACITY-ANALYSIS RESULTS - NONSTATIONARY
Exp

Cap

RAI

VAI

VFR

AC

U
C
% Chg

2,811,000
2,850,448
1.38

3,566,600
14,775,238
75.86

OFR
65.53
62.78
-4.38

RFR
87.15
86.88
-0.31

99.74
99.80
0.06

0.1899
0.1817
-4.53

U
C
% Chg

2,896,400
2,887,911
-0.29

3,299,300
3,499,606
5.72

65.73
62.57
-5.04

94.71
94.67
-0.04

92.91
92.52
-0.42

0.2093
0.2094
0.03

U
C
% Chg

2,409,700
2,299,218
-4.81

3,821,400
4,283,462
10.79

62.71
61.72
-1.60

85.27
84.79
-0.56

99.83
99.77
-0.06

0.1758
0.1790
1.77

U
C
% Chg

2,287,100
2,170,939
-5.35

3,444,700
4,244,086
18.84

64.40
62.21
-3.51

100.00
100.00
0.00

96.58
96.88
0.31

0.2044
0.2022
-1.09

U
C
% Chg

3,155,600
2,489,441
-26.76

5,087,900
17,464,499
70.87

90.02
71.46
-25.97

87.19
87.30
0.12

99.84
99.87
0.04

0.1625
0.1630
0.34

U
C
% Chg

3,070,600
2,418,864
-26.94

4,880,100
4,107,588
-18.81

90.97
70.63
-28.80

97.97
98.30
0.34

94.91
95.90
1.03

0.1985
0.1977
-0.42

U
C
% Chg

3,214,000
2,709,862
-18.60

3,713,800
3,640,326
-2.02

92.36
69.18
-33.50

87.24
88.34
1.25

99.50
99.80
0.30

0.1891
0.1899
0.41

U
C
% Chg

3,136,100
2,787,942
-12.49

3,878,400
7,389,062
47.51

93.57
68.36
-36.87

94.30
94.94
0.68

91.88
92.90
1.10

0.2053
0.2057
0.19

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