Automatic replenishment programs: An empirical examination

Journal of Business Logistics, 1999 by Daugherty, Patricia J, Myers, Matthew B, Autry, Chad W

Accurate demand projection, i.e., good forecasting, has seemed almost a fantasy in recent years. Shorter product development cycles, product proliferation, and global-based competition have made it more difficult to successfully manage demand.' Too often product availability and order quantities fail to "match up" resulting in problems including excessive inventory investment, poor customer service, lost sales opportunities, and inefficient production scheduling.2 Thus, many firms have sought better ways of managing inventory replenishment.

New approaches to inventory management aimed at improving system-wide efficiency have become popular recently. A number of different terms are used to designate such programs; however, we will use the umbrella term automatic replenishment programs (ARPs). Automatic replenishment is used to signify an exchange relationship in which the seller replenishes or restocks inventory based upon actual product usage and stock level information provided by the buyer. Popular automatic replenishment programs include continuous replenishment planning (CRP) and vendor managed inventory (VMI). CRP and VMI are very similar except that with VMI the vendor assumes responsibility for deciding what and when to ship? Industry-specific automatic replenishment programs have also been developed. For example, efficient consumer response (ECR) is widely used within the grocery industry and quick response (QR) programs are common in the apparel industry.

Automatic replenishment programs have received considerable attention in popular-press and trade publications.4 Most of the accounts are anecdotal, providing company-specific examples. Little empirical work has appeared in academic publications. One recent academic piece reported on the use of a simulation model to examine VMI. The authors found "compelling economic and operational benefits" associated with VMI.5 Thus, the current exploratory research was undertaken in order to empirically examine automatic replenishment involvement.

BACKGROUND

The intent of the automatic replenishment programs is to make inventory commitment more efficient. Of course, this must be accomplished without sacrificing sales or customer relations. Product availability must be balanced against carrying unnecessarily high stock levels. The solution is to substitute information for inventory. Actual sales figures and buyer-supplied information triggers replenishment. This requires close cooperation between retailers and manufacturers. The trading partners must trust one another and be willing to share proprietary/confidential information.6

The following quote succinctly describes VMI, one of the most common types of automatic replenishment currently in use.

... suppliers assume the responsibility for managing inventories at customer locations through the use of highly automated electronic messaging systems. Detailed sales and demand data are exchanged between vendors and customers, and the information is used to plan and implement product replenishment and sales strategies.7

Thus, the basic components or building blocks of an automatic replenishment program include decision support systems, product identification technology (bar coding), and electronic data interchange (EDI). The components should be considered enablers, but not an absolute requirement for ARP-type programs8 For example, if only a low number of stock-keeping units are being managed, all three may not be required. However, many automatic replenishment systems incorporate all three items.

Involvement in automatic replenishment is expected to yield a range of benefits including increased sales per store for retailers due to more efficient stocking and more frequent deliveries, higher selling space productivity because of fewer stock-outs, and a need for less "back room" storage space for safety stock. Safety stock, if not totally eliminated, can usually be dramatically reduced.' Manufacturers benefit from lower manufacturing and distribution costs through better matching of supply to demand and improved production planning." In reporting on a nine week VMI case study of 18 VF Corporation stores, Nannery identified significant reductions in inventory per store, increased inventory turns, and substantial increases with respect to in-stock percentages. However, he also noted that such programs are "by no means painless for vendors. " Retailer inventories may be reduced, but manufacturer warehouse inventories actually increased, at least at first.11

SCOPE OF STUDY AND RESEARCH HYPOTHESESS

Little empirical research appears to have been published examining automatic replenishment programs. The limited information that was found focuses on case-type studies, mostly in the grocery industry.12 One exception that was identified is Fiorito, May, and Straughn's (1995) survey of quick response among retailers.13 While they did not directly measure QR implementation, they did assess the retailers' utilization of electronic data interchange (EDI), automatic replenishment systems, and barcodes.