Automatic replenishment programs: The impact of organizational structure

Journal of Business Logistics, 2001 by Sabath, Robert E, Autry, Chad W

Inventory management-deciding how much product is needed and where it's needed-is one of the toughest supply chain challenges. Historically, firms relied upon push systems and pushed as much product out through the supply chain as possible in anticipation of potential demand. Product was positioned just in case it was needed. Such an approach was thought to have a positive impact on customer service/satisfaction. However, it almost always has a negative impact on overall supply chain efficiency. Simply put, indiscriminate loading of the supply chain is wasteful and ultimately expensive. Also, recent research indicates that the purported service-related benefits are a myth. Closs et al., found that a "response-based supply chain model consistently outperforms the anticipatory model in terms of customer service..."'

Thus many firms have shifted from reliance upon forecast-driven push systems to response-- based "partnering initiatives" aimed at improving cross-firm supply chain efficiency.' The response-- based approach relies upon extensive sharing of information between supply chain members to pull product through the channel based upon actual consumer sales. A variety of labels are used to designate such inventory replenishment systems-Vendor Managed Inventory, Continuous Replenishment Programs, and Quick Response for example. However, we shall use the term automatic replenishment programs (ARPs) to signify all programs in which inventory restocking is triggered by actual sales rather than relying upon long-range forecasts and safety stock buffers.'

ARP-type systems are still relatively new. The current exploratory research was undertaken to learn more about the programs. The researchers were particularly interested in the influence of organizational structure on ARP performance and information systems capabilities. Is one type of organizational structure-centralized versus decentralized-more conducive to ARP-related success than the other? Before addressing that issue, a brief review of relevant literature relating to ARPs and organizational structuring is presented in the following section. Subsequent sections provide a description of the research design/focus, detailing of analysis and results, and an indication of the managerial implications. Mini-profiles are also provided for firms currently using automatic replenishment.

AUTOMATIC REPLENISHMENT PROGRAMS

Automatic replenishment programs are designed to streamline the flow of goods within the channel, while simultaneously allowing the seller to sustain effective customer service. Point-of-sale data are typically collected at the retail level and transmitted to the supplier via EDI. The supplier is thereby able to respond to demand on a just-in-time basis. Replenishment is triggered by actual sales figures rather than by manual ordering based on stock counts. ARP systems require a high degree of coordination between retailers and manufacturers; however, the programs have been shown to enhance retailer and manufacturer performance in both domestic and international contexts.

A number of different terms are used to designate ARP-type inventory systems. Efficient Consumer Response (ECR) programs within the grocery industry were among the first replenishment programs to use EDI and barcoding as demand smoothing tools. Similarly, the apparel industry introduced Quick Response (QR) programs designed to "pull" stock into the stores when needed based on point-of-sale data.' Other than industry-specific programs such as ECR and QR, the most common method of classifying ARPs is based upon where the replenishment decision is made, i.e., by the buyer or the seller. The terminology used most often is Continuous Replenishment Programs (CRP) and Vendor-Managed Inventory (VMI). With both CRP and VMI, replenishment is triggered by sales data. However, responsibility for setting target inventory levels and making restocking decisions differs between the two approaches. Under CRP, the buyer makes the decisions. As the name suggests, vendors assume more responsibility and actually manage inventory levels in VMI systems.'

Some reported benefits of ARPs include quicker deliveries, faster inventory turns, fewer stock-outs, fewer markdowns, and lower inventory investment,' as well as reductions in lead times,' reduced delivery and administrative charges,' and reduced handling of product/increased worker efficiency. 11 ARPs are also thought to yield benefits in the form of increased sales, higher sales space productivity, and/or the reduction of backroom storage areas." Three overall types of benefits are commonly associated with the systems: cost savings, enhanced levels of customer service, and improved efficiencies (in manufacturing, sales, and/or forecasting). However, difficulties do exist. For example, it is often necessary to overcome mistrust associated with adoption of the new systems and the need to divulge information to trading partners. Also, substantial funding for technology investments may be required.12 In spite of such drawbacks, ARPs have been positively associated with firm profitability and performance." However, further research in the area of automatic replenishment is needed to better understand the trade-offs involved as well as the full potential the programs may offer.