Vendor Managed Inventory

Chapter 1. Introduction

1.1 VMI background

For a long time, inventory has been fragmented in circulation, each process having its own supply chain inventory controlling strategies and managing their own inventory. This inevitably produces distortions in the ordering process. So there are abnormal fluctuations in inventory in all aspects of the supply chain if demand increases gradually. These fluctuations have a huge impact on supply chain efficiency and response speed. However, in traditional inventory management it is very difficult to change this situation. Therefore, in recent years, there has emerged a new supply chain inventory management method -- Vendor Managed Inventory (VMI). This inventory management method has broken the traditional fragmentation of the inventory management model, it reflects the thinking of integrated supply chain management and adapts to changing market demands, and it is a representative of new inventory management thinking (Cao and Li, 2009).

With VMI, it is the supplier who decides on the appropriate inventory level and the reasonable policies to maintain those levels. The customer allows supplier to manage their inventory. In this relationship, both sides expect the lowest costs. The customer can propose the requirements of service level and inventory level to the supplier. That is, under the VMI, the supplier's role shifts from passive implementer to policy maker (Simchi-Levi et al., 2003; Mishra and Raghunathan, 2004).

Currently at the international forefront of supply chain inventory management models, VMI has an impact on the formation and development of the entire supply chain. Its core idea is that the supplier decides on the appropriate inventory levels of each of the products and the appropriate inventory policies to maintain these levels (Simchi-Levi et al, 2008). Thereby VMI break the traditional supply model that generate orders first, then replenishment.

1.2 VMI in China

As early as 1985, Wal-Mart and Procter & Gamble had begun the implementation of the VMI system. At present, both upstream enterprises and downstream emprises have the very successful examples, VMI being already a very mature management mode in many countries.

Currently in China, supply chain management is only just emerging; in China very few enterprises have tried to implement the VMI system, most of the enterprises that implement the VMI system are foreign multinational companies or manufacturing plants set up by multinational enterprises, these manage their distributors in China through the VMI system. For example, L'Oreal in China has established a dedicated VMI management team to manage their distributor and distribution system.

Regarding Chinese local enterprises, the VMI system develops rapidly in most of the large scale enterprises, such as Lenovo, who began the implementation of a VMI system with their upstream raw materials suppliers in 2004, this implementation five years ago has improved efficiency, significantly reduced the enterprise's raw material inventory, reduced the cost of supply chain management, and enhanced its core competitiveness of the enterprise. At the same time, Haier (Wu et al, 2006), Midea, Huawei(He and Chen, 2008) and other large enterprises have been adopting the VMI system. And other Chinese large and medium sized enterprises are also actively preparing to attempt the introduction of the VMI system.

Vendor-Managed Inventory is a new supply chain inventory management method, whose application in China just in its first stage at time of writing. There are several requirements that must be considered before implementing VMI. There are good opportunities for Chinese enterprises to develop and apply the VMI system. First of all, as regards macro environment, the Chinese government is encouraging enterprises to become bigger and stronger; with the expansion of an enterprise's scale, the information management requirements become more pressing; this corresponds to providing a broad space for the development of VMI.

Second, an important opportunity is that many enterprises have realized the importance of logistics in cost control, and the Chinese government is also encouraging the development of logistics centre, transforming the original Chinese logistics network at the same time. Many modern multi-functional logistics enterprises have emerged, and created a good hardware environment for VMI.

Finally, Chinese software enterprises have shown vigorous development, especially in management software, such as ERP, CRM. These are prepared for the particular company. Therefore, with some changes such software can fully support the VMI.

1.3 Overview of the Case

Henan Shuanghui Industry Group CO., Ltd. was established in July 1958 in Henan province, and is based in Luohe, China. It is the largest meat-processing-based food group in China. It engages in feed manufacturing, animal breeding, slaughtering, meat processing, retail grocery outlets, and bio-pharmaceutical operations. The Shuanghui Group owns a chain of food stores in Henan, Hunan Hubei, Sichuan, Inner Mongolia, and Shanghai, China. The company serves the Chinese market as well as exporting its products to Japan, Singapore, Philippines and Europe.

The Shuanghui Group is continues to use modern logistics to transform the traditional food industry, it took the lead in bringing the cold chain model to China, and has realized the transformation of traditional retail sales. The Shuanghui store was established in 2000, and mainly sells cold meat and meat products. Currently Shuanghui has built nearly 400 such Shuanghui stores in China, to achieve an annual turnover nearly 2 billion Yuan, and become one of the top 100 retail enterprises in China.

In the past two years, the Shuanghui Group established VMI system in order to enhance market competitiveness. The new system has brought new problems. The VMI concept is not consummate in China; there are some obstacles and issues in implementation. That is why the author chose the Shuanghui Group as a case study.

In the following, the research aim and objectives are stated. In subsequent chapter, the author will attempt to present answers.

1.4 Research questions and objectives

Because VMI system can bring many benefits to inventory management, more and more Chinese enterprises have started to concern themselves with the VMI system. VMI will become more and more popular in China. Nowadays, the Shuanghui Group as a larger-scale food enterprise is also trying to implement VMI system. At the same time, it will be confronted with many obstacles and challenges, and how to overcome the obstacles and challenges is the key to better implementation of VMI system. This research focuses on the Shuanghui Group's canned meat production, and on the supplier responsible for providing them with the cans. The question of this research is “How to make VMI more efficient in the Shuanghui Group.” To this end, the author studied the status of VMI implementation.

The objectives of the research are as following:

Ÿ Through case study, to understand the benefits of the VMI system;

Ÿ Through interview to find out the issues of VMI implementation in Shuanghui Group, and to identify the conditions of implement VMI;

Then the basic questions are:

Ÿ What are the benefits of VMI for the Shuanghui Group?

Ÿ What are the conditions necessary for implementation of the VMI system?

Ÿ How has development of the VMI system in the Shuanghui Group? What are the obstacles to its development in the Shuanghui Group?

1.5 Research structure

Chapter 1 presents the background of VMI, as well as the Chinese environment. It puts forward the research objectives and the case company also introduced.

Chapter 2 reviews the principles and concepts of VMI, describing the relationship between VMI and SCM. The risks and effects of implementing VMI are also considered.

Chapter 3 introduces the research methodology and explains the research methods and research strategies, as well as the approaches to data collection and data analysis adopted in this study.

Chapter 4 presents the author's findings from the telephone and e-mail interviews. The qualitative data explains how the Shuanghui Group implements VMI and what the benefits are that VMI can bring to Shuanghui Group and their supplier, as well as some issues.

Chapter 5 is an analysis and discussion chapter, it presents how and why VMI can bring such benefits to the Shuanghui Group and their supplier from five aspects, as well as analyzing some potential issues in the implementation of VMI..

Chapter 6 is the conclusion of this dissertation. It makes states the limitations of the present research and makes suggestion regarding further research.

Chapter 2. Literature Review

2.1 Introduction

New information technologies continue to increase, as does competition; this has led to the development of new inter-organization relationships in the supply chain. One such relationship is the vendor-managed inventory, or VMI (Andel, 1996).

VMI, also known as continuous replenishment or supplier-managed inventory, is now widely used in the retail industry. In the VMI process, the supplier assumes the responsibility of managing the customer's inventory, making decisions, such as when and how much inventory to ship to the customer. The supplier usually uses advanced information technology such as Electronic Data Interchange (EDI) or Internet technology to monitor the customer's demand information and stock level. As these technologies continue to become less expensive, and, therefore, more common in industry, it is expected that programs such as VMI will also become more and more popular. Wal-Mart and P&G are the most well-known successful cases of implementing VWI. There are also many other companies which have implemented VMI, such as Nestlé and Tesco (Watson, 2005), Boeing and Alcoa (Micheau, 2005), Kraft Foods (van Weele, 2005), Johnson & Johnson, Shell Chemical, General Electric, Intel.

2.2 Definition of VMI

Regarding vendor-managed inventory (VMI), Harrison and van Hoek (2008) defined it is an approach to inventory and order whereby the supplier, not the customer, is responsible for managing and replenishing inventory. Lysons and Gillingham (2003) consider that VMI is a Just-In-Time (JIT) technique in which inventory replacement decisions are centralized with upstream manufactures or distributors. VMI is a strategy to conduct Supply Chain Management (SCM) and implies that the supplier is given full responsibility for managing the customer's inventory levels (Disney and Towill, 2003a). Angulo et al (2004) also think it is one of the most widely discussed partnering initiatives for encouraging collaboration and information sharing among trading partners; it is an operation mode of inventory in the supply chain environment.

Lysons and Farrington (2006) defined VMI as a JIT technique in which inventory replacement decisions are centralized with upstream manufacturers or distributors. Acronyms for VMI include:

Ÿ Continuous replenishment programs (CRP)

Ÿ Supplier-assisted inventory management (SAIM)

Ÿ Supplier-assisted inventory replenishment (SAIR)

Ÿ Efficient consumer response (ECR)

In the VMI process, the customer is free to forecast and create the orders as the vendor generates the orders. The supplier is responsible for monitoring the sale and inventory, and uses the information to replenish orders; in fact, the supplier takes over the tasks of inventory replenishment. Mangan et al. (2008) believe that by enabling a vendor to manage stock replenishment at their facilities, a customer is effectively eliminating an echelon in the supply chain. In doing so, upstream demand visibility is improved to reduce the impact of demand fluctuations. Hence, VMI can enable supply to meet demand more accurately and more precisely.

The benefits of VMI can be significant. Many benefits derive from the fact that the supplier services represent a timely and undistorted demand signal. Without these programs, the supplier can only receive the replenishment orders from the distributors. These orders are usually quite different with the distributor's actual demand. Besides, a distributor's order may include adjustments to inventory as the retailer's forecasts for demands may change in the future. The orders may also be artificially inflated if the retailer suspects that the supplier has limited capacity and would not be able to meet its full orders. Finally, the retailer might grant a number of demands over different periods into a single order, thus creating a lumpier demand flow for the supplier. Under VMI and its related programs, the supplier typically gets a daily feed of actual retailer demand and stock level through electronic data interchange (EDI) or over the Internet (Potter et al, 2007). Moreover, the retailer may share information on upcoming promotions or big customer deals as part of a formal collaboration process. All of these combine to reduce the uncertainty of supplier's demand. With more predictable demand, the supplier will be able to reduce their inventory levels and improve their services to customer at the same time. As a result, distributors would be able to reduce their inventories and increase its own services, resulting in increased sales for the entire supply chain (Mentzer, 2004).

Waller et al. (1999) have studied the potential benefits of VMI in the supply chain. In the process VMI, the supplier monitors the inventory levels of retailers and regularly replenishment decisions regarding the number of orders, delivery methods, and the supply time. With VMI, a supplier can reduce demand uncertainty, so that allowing a specified service level to be maintained at minimal inventory and production cost. The customer's benefit from implementing VMI is a better balance between the conflicting performance measures of inventory holding cost and customer service.

VMI service for key customers is perhaps one of the more value-enhancing activities performed by suppliers (Trim and Lee, 2006), when their past performance allows customers to develop trust in the supplier's capability to manage their inventories. The inventory carrying costs are then minimized and stock out are avoided. From the customer's perspective, allowing a supplier to track inventories, determine ship schedules and order quantities saves time, which could be better spent on more strategic sourcing activities. In addition, the customer can delay taking ownership of a product until it reaches the stocking location, reducing inventory carrying costs. From the suppliers' perspective, this means they can avoid ill-advised orders from the customer, as they decide how the inventory is set up, when to ship it, how to ship it, where it goes, and they have the opportunity to educate their customers about their other products.

2.3 VMI and SCM

Today, more and more attention has been given to the concept of supply chain management (SCM). SCM is a product and final service pack in internet enterprise management for the needs of end customers (Harland, 1996). Mentzer et al (2001) define SCM as the systematic and strategic coordination of traditional business functions. It also involves the entire supply chain within the company, as well as the strategies of these functions. Supply chain management aims to improve the long-term performance of each enterprise and the entire supply chain. Mentzer et al (2001) also studied that all members of a supply chain need to service customers in the same goals and priorities. The enterprise must understand the implications of managing information, finances, products and services throughout the supply chain.

Total cost

The supply chain is seen as an integrated system. The total cost concept is a very effective tool for supply chain management (Croom et al., 2000). The elements of the total cost concept are as follows:

The Total Cost Concept (Lambert et al., 1998)

Administration costs

There are two aspects of administration costs: information costs and order processing costs. The speed and quality of the information exchange is very important in the supply chain; the information flow directly affects the cost and efficiency of the entire supply chain. The order processing system is very important for the entire supply chain. A customer order is the propellant that sets the entire supply chain in operation (Whicker et al., 2009).

Inventory costs

Inventory exists in the entire supply chain system. Inventory costs include inventory carrying costs and warehousing costs. Inventory carrying costs include costs that vary with the level of stored inventory. These cost including capital costs; inventory service costs; storage space costs and inventory risk costs (Fawcett et al., 2008). Warehousing costs are all the expenses that can be eliminated or must be increased when the number of warehousing facilities changes. Most warehousing cost will not change with the change of inventory level, unless the location changes.

Service level

Service level is delivering the right product in the right quantity at the right time to the right customer (Christopher, 2004). According to Christopher, the relationship between the service level and the service level cost can be described as a rising curve. This relationship is due to an increased inventory costs that are needed to cover higher levels of demand.

The cost of service (Christopher, 2004)

Production costs

Holweg et al. (2005) studied that material planning aims to create a production process are free from interference where the costs are as low as possible. This is achieved by having as much material as possible available without capital pressure.

Transportation costs

Gunasekaran et al. (2001) argued that the transportation costs are the single largest cost component of supply chain cost. The cost is often half of the total cost in a supply chain. In this, trucking cost is the most expensive. According to Disney and Towill (2003a), there are two ways to minimize the transportation costs: through the distribution centre or making full use of truckloads. Hines et al (2000) studied that because trucks often return empty this means transports only achieves 50% fill rate.

The objective of VMI is to improve the aggregate performance of the supply chain (Bernstein et al., 2005).


In the VMI relationship, the supplier will be fully responsible for the ordering process (Tanskanen et al., 2009). This may increase the administrative workload of suppliers and increase their administration costs. By contrast, customers will decrease their administration costs. However, order processing costs will decline in the entire supply chain (Pohlen and Goldsby, 2003).

Waller et al. (1999) argued that VMI can reduce the misunderstandings between the customer and the supplier, hence reduce the error orders. Suppliers will have a more accurate understanding of demand, which can help them to better develop their production plans in order to meet the customer's demand.

Inventory level

According to Waller et al. (1999), VMI leads to a great decrease in inventory level. Christopher (2004) proposes that, due to suppliers having direct access to information about customer demand, their safety stock will be reduced. Further, he argued that the customer will benefit from the relationship. This is due to a significant decline in inventory level, as well as a decrease in stock out risk. According to Lapide (2001), the inventory level decrease is due to the customer and their supplier not needing to stock more inventory than demand. Pohlen and Goldsby (2003) stated that in VMI, sales are no longer the standard to measure service level, instead, focus is on the performance of the entire supply chain..

Service level

There are two strategies which could increase the service level without increasing costs. One is accelerating the information flow through the supply chain; another is faster transportation. Kuk (2004) argued for accelerating the information flow. He considered that one of the benefits of VMI is that the supplier can make more accurate forecasts due to the information about sales from the customer, thereby to better meeting the customer's needs. According to Waller et al. (1999), with VMI, a supplier can better develop transportation plans, and then deliver the products to the customers more quickly and accurately. Hines et al (2000), Kuk (2004) and Waller et al. (1999) conclude that VMI can increase the service level because the risk of stock out is reduced. In the long run, this will lead to a potential increase in sales (Pohlen and Goldsby, 2003).


Waller et al. (1999) stated that both customer and supplier's production will be smoother under VMI. The two sides can have a more rational use of resources, thereby reducing the cost. Hines et al. (2000) argued that the production in the supply chain will be more flexible due to the increase in information flow. Lapide (2001) recognizes the full use of VMI information is a key to the success of VMI. If suppliers fail to integrate the VMI information into their forecast they can never fully benefit from VMI (Lapide, 2001). Suppliers must make full use of the information in the short term, as well as the long term, in order to reduce their forecasting error. Lapide (2001) claims this to be one of major challenges of VMI.

VMI and forecast relation (Lapide, 2001)

Vergin and Barr (1999) considered that reduce inventory levels and increase service levels are more likely to occur on the customer. They also stated that it is difficult for the supplier to incorporate VMI into the production. In their research, they found that only 20% of suppliers could achieve better production management by VMI. Only 10% of suppliers could decrease the internal inventory.

Transportation cost

Accurate information about sales and demands can help suppliers optimize their transportations, and develop effective routing plans, which can lower transportation costs (Waller et al, 1999). Disney and Towill (2003c) stated that in the short time the deliveries will be the same as before implementing VMI into the supply chain. However, in the long run, the supplier will use fewer deliveries due to the ability to plan the truckloads needed based on customer demand. This leads to a decrease in transportation costs.

It is important that the partners in a VMI relationship should believe in each other and in the transparent information that is shared between the organizations (Simchi-Levi and Zhao, 2003). Suppliers will face demands from customers and more stable increase in information flow. This will lead to a gain in flexibility and improve the supplier's ability to plan their production. On the other hand, customers will receive a lower inventory levels, reduce management costs, and increase in the service level, reducing the risk of stock out. There is enhanced working capital due to reduced inventory levels and obsolescence and enhanced inventory turnover ratio with improved cash flow. In the long run, VMI will lead to a higher turnover rate for the entire supply chain (Hines et al, 2000).

Variations of VMI have become more and more popular among enterprises in the last couple of years as a way of reducing in-stock stocks. Lowson et al. (1999) consider a form of VMI such that the vendors assume more responsibility for the store inventory by simply holding stock in their own warehouses and shipping it when the retailer asks for it. However, vendor production is based upon the pre-season estimate of demand, i.e. the buyer's plan. It entails minimal shipments at the start of a season, followed by frequent, small, point-of-sale (POS) driven replenishments. Here they have been kind to the retailers. In fact, few of them have the ability to analyze POS data, re-estimate demand, and place informed reorders. For the most part, they use a kind of minimum stock triggering mechanism to judge when more of a stock keeping unit (SKU) is needed, and later in the season many orders cannot be filled.

Under the VMI system, a contract between customer and supplier can influence the replenishment decision of the supplier, thus affecting the entire supply chain. Cachon and Zipkin (1999) studied a decentralized system of customer and supplier. They also considered stock out costs of the customer and of the supplier. They examined a periodic review model in which inventory decisions were made by both sides and proposed contracts (transfer payments) that coordinate the channel. Nagarajan and Rajagopalan (2008) found that there exist simple holding cost subsidy based contracts that can improve system performance, as well as more complex contracts that are best.Transport Load Builder allows to model shipping rules individual to each trading partner. An advanced algorithm calculates optimal truck loads considering business rules as well as channel inventory and expected demand and supply in generating multi product shipments.

In the analysis that follows, VMI yields a better performance than importing but falls short of quick response (RQ) (Lowson et al., 1999). VMI is an important logistics mode of the QR system, its main attraction is that it serves as a necessary first step for implementing QR. Rusgton et al (2004) identified QR as a further development of the JIT approach, the aim is to link the manufacturer more closely to the actual demand at the retail level. They also considered that VMI can significantly improve the operational efficiency of the QR system, and speed up the entire supply chain's response time on the market, knowing early the demand information; also, it can minimize the operation costs of the entire supply chain, thereby enhancing its market responsiveness and market competitiveness. The drawback is the heavy load it places on the manufacturer, lacking as it does any SKU sales information to allow intelligent production planning and finished goods inventory management.

2.4 Key enablers in VMI

Peterson et al. (2005) surveyed 169 purchasing managers and concluded that information quality and trust both had a positive influence on the planning process.

2.4.1 Information system

Barratt (2004b) focuses on information as a key to the success of VMI implementation. In order for the supplier to be able to manage this inventory, information about inventory levels, expected demand, promotional activities, and product related costs should be made available to the supplier by the buyer (Barratt, 2004a; Kumar and Kumar, 2003). Peterson et al. (2005) considered that information was broken down into: information sharing, availability, completeness and reliability. Information quality was broken down into accuracy, timeliness, completeness, consistency and ease of access. Furthermore they noticed that information shared through linked information systems had a larger impact on collaborative planning effectiveness than information shared in more traditional modes.

An effective information system can be divided to two parts: information technology and integrated production system (Holmström, 1998). Focusing on data accuracy and processing, bar coding and scanning are necessary. If it is propose of make a direct link between the customer and the supplier, Internet or electronic data interchange (EDI) has to be made in order to deliver sales data and other related information. A direct link can also keep away entry error and reduce data transfer time. It will require an integrated system in which real time data is available which can incorporate planning, inventory, production and distribution in order to make full use of the system. This is effective in solving the information system requirement for the VMI system's integration with an amazing enterprise resource planning system.

In all recorded cases of organizations that are using VMI, some connection has been made between the members to facilitate the exchange of information on inventory, use of product and re-supply issues. In general, it was the electronic data interchange that provides this connection. Haavik (2000) said that only when people realize the full benefits of VMI can they use electronic data exchange tools well. However, Lawrence and Vokurka (1999) and Challener (2000) argued that in some situations the exchange was a manual process. In such cases, the inventory level was monitored by a representative from the upstream supply chain member.

2.4.2 Relationship

Barratt (2004b) conducted 32 interviews across six companies to indentify the importance of the relationship, leading to the identification of enablers such as mutual interdependency, openness, trust, honesty, chemistry between both partners, the frequency of interaction, and commitment. Commitment was described as willingness of both partners to invest in a long term relationship. Not only is management commitment important, but commitment at multiple levels of the organizations involved.

Hines et al. (2000) and Blatherwick (1998) argued that the partner that is most able and in the best position to manage the inventory levels should be in control of it. This does not necessarily mean the strongest part. However, Krajewski and Ritzaman (2002) propose that the supplier should be the owner of the stock and the customer only pays for useful goods.

Managing power is a critical success factor in the VMI between an enterprise and a supplier. In addition to changing the organizational aspects of procurement strategies and policies, transparency in the management is another important factor to realize the benefit of VMI between customer and supplier. Lamming et al, (2001) found that the transparency in relationships includes the two-way exchange of sales, costs, inventories, information, and knowledge between the customer and the supplier. In order to maintain the transparency in the relationship between customer and supplier, negotiation mechanisms and regular review of negotiation mechanisms are necessary. Moreover, enterprise and supplier can develop a tactical decision support system (Achabal et al., 2000) to ensure data transparency, as well as assist in transportation policies and coordinating inventory management.

Achabal et al. (2000) also studied a key business motivation for developing VMI is to strengthen the relationship between the supplier and enterprise. Some specific objectives of VMI are as follows: (1) give the customers the best opportunity to purchase the supplier's products, (2) help the enterprise manage their inventory more effectively, and (3) assist the supplier in production scheduling. Duchessi and Chengalur-Smith (2008) argued that there are four conditions necessary for the implementation of VMI: (1) consistent target, (2) benefit-sharing, (3) coordinated operation and (4) visibility of customer's inventory status.

2.6 Effects of VMI

The main objective of VMI is achieving a win-win situation for both customer and supplier. With VMI, suppliers can develop their own production plans and replenishment schedules as long as they meet a customer's requirement. This allows suppliers to stabilize their production and optimize transportation (Waller et al., 1999). For the customer, administration and inventory costs can be decreased. Enhanced collaboration between both supply chain partners should reduce lead times and minimize the risk of demand amplification in the supply chain (Disney et al., 2004; Reiner and Trcka, 2004).

2.5.1 Advantages

The main advantages of VMI are to reduce costs, increase service and provide greater transparency in the supply chain (Angulo et al, 2004). One of the most important advantages for suppliers is that they are better able to optimize the production process to meet customer demand. (Dong and Xu, 2002; Tyan and Wee, 2003; Waller et al., 1999). Because the supplier can collect the information earlier and understand the actual demand from the customer and make more accurate forecasts, this result in reduced fluctuations; the supplier can also be more proactive in responding to customer demand. Furthermore, when VMI is implemented in a large scale company, the flexible replenishment schemes can help a supplier achieve full truckloads, which will result in a reduction of transportation costs (Lee, 2004; Waller et al., 1999). Another advantage for the supplier is reduced inventory costs because the supplier's safety stock is reduced due to the uncertainty is reduced (Dong and Xu, 2002; Kumar and Kumar, 2003; Tyan and Wee, 2003). Finally, an important advantage for suppliers is that they can establish a long trustworthy relationship with the customer, thus securing sales (Vergin and Barr, 1999; Xu et al., 2001). Williams (2000) reiterated that the benefits of VMI include improved customer loyalty and reduced forecasting error. Andersen Consulting (now Accenture) estimated that organizations could realize capital reductions in inventory and receivables of 20–30% through the use of VMI, based on results that they had observed in the chemical industry (Challener, 2000). Bernstein et al, (2005) also argued that the implementation of VMI at Wal-Mart, JCPenney, and Dillard Department stores had resulted in sales increases of 20%to 25% and 30% inventory turnover improvement.

The customer benefits are related to a reduction in administration costs because extensive materials requirement planning is not necessary anymore, whereas individual purchase orders are replaced by blanket purchase orders (Aichlmayr, 2000; Kumar and Kumar, 2003). Since there will no longer be backorders or returns, administration costs will decrease even more (Holmström, 1998). Hines et al. (2000) also argued that the customer will obtain a lower inventory level, reduced administration costs, and reduced risk of stock outs. Furthermore, the customer benefits from improvement of service levels (Hines et al. 2000; Kumar and Kumar, 2003; Tyan and Wee, 2003) due to a better cooperation and understanding of each other's needs.Automated sales order creation

From the view of the entire supply chain, there are some additional benefits. Most importantly, it prevents suboptimization. In the traditional supply chain, the customer decide the time and amount of the replenishment. These decisions only took into consideration the customer's actual inventory and operating cost and ignored the supplier's transportation costs and production capacity. This led to suboptimal decisions (Cousins and Spekman, 2003). With VMI, a supplier can get more information on inventory level and customer demand; such information can help the supplier to make better decisions for the entire supply chain, thereby improving the efficiency of the entire supply chain and reducing the costs. The timely and continuous information exchange between customer and supplier should reduce bullwhip effect (Disney and Towill, 2003b; Disney et al., 2004; Reiner and Trcka, 2004), which caused by inaccuracies information and forecasting.

While many benefits have been identified in the literature, there are also some challenges that may exist in practice and that can potentially reduce the benefits obtained from VMI or result in failures in the VMI system.

2.5.2 Limitation and obstacles

Holweg et al, (2005) used case studies to identify weaknesses in past VMI implementations and found that effectiveness is dependent on the integration of internal and external operations and whether the VMI strategy is suitable to supply chain and its configuration. Moreover, they provided a theoretical classification of VMI systems, based on the degree of collaboration and cooperation in planning inventory.

Robert and Ireland (2002) believe the major weakness of VMI often lies in the supply chain with insufficient visibility. The POS data and the backroom inventory level data are disregarded while the replenishment process (and the inventory policy) is based on the variation of stock level in the customer's main warehouse (or distribution centre). Some North American VMI is based on actual sharing of POS data, which must be noted. However, VMI was limited by the visibility of customers' distribution centre.

When VMI is not properly implemented, it will show some disadvantages. Some possible drawbacks of VMI might include: EDI problems, employee acceptance, trust among supply chain partners. Because of the many different standards in utilized, EDI sometimes creates a challenge, which makes it difficult to communicate and exchange information between companies. Customers must be able to communicate with their partners in real time and in a uniform way if they are to assume stock keeping responsibility. Under VMI, all employees involved in the process must exactly understand and accept the new method of doing business and they also must be willing participants (Arjan J. Weele, 2005).

One of the main obstacles, especially for promoted products, to achieve improved performance is inaccurate forecasts (McCarthy and Susan, 2002). There is no visibility of POS data, so VMI is not an efficient tool to manage promotion. It only allows an after-promotion analysis, without allowing the trading partners to intervene during the promotion (basically because the data are not available until the promotion is finished). Since the food industry, especially in Europe, is characterized by its players running multiple promotions as a way of generating increased sales (Fernie et al, 2000), if customers rely on inventory levels of distribution centre to trigger deliveries, the replenishment process will be inefficient.

Setting up rules for how the relationship what between enterprises can also lead to the failing of VMI. Finally, both parties must understand that this takes time because needs to be learned constantly. Trust is also as important as time. Many enterprises are naturally unwilling to share information in advance, because they worry that the information will somehow fall into the competitors' hand or they will lose control in some way.

As a result of these weaknesses, the enterprise has a large extent abandoned VMI and has led the search for alternative techniques. However, VMI will continue to be one of the methods employed in the search for greater supply chain efficiencies (Robert and Ireland, 2002). VMI may still be useful for organizations which are not sufficiently ready for the more advanced practices, such as collaborative planning (Kurt Salmon Associates, 2003), or in situations where demand volatility is relatively low, though VMI may no longer be considered best practice in consumer retail logistics.

Limitations and obstacles in China

Sense of the supply chain is weak

According to a survey by GS1 China (2006), most Chinese enterprises do not understand the concept of supply chain management. More than 200 enterprises belonging to different industries, from Beijing, Shanghai, Shenzhen and 11 other provinces or cities, were surveyed. More than 90% of enterprises did not understand the concept of supply chain management. This survey shows that the lack of a concept of supply chain is a problem for many Chinese enterprises.

The credit system is incomplete

The goal of supply chain management is to optimize the overall efficiency and benefit of the supply chain; it requires the member enterprises to strengthen cooperation and share information with each other. The relationship between enterprises it thus no longer the "traditional" hostile relationship, but has become a cooperative, “win-win” strategic alliance. This relationship is based on the establishment of trust between enterprises. Therefore, a perfect credit system is the premise of successful implementation of VMI. The credit management systems in western developed countries are more mature, compared with China, where they are relatively undeveloped (Xiao and Chen, 2007).

Lack of awareness of cooperation between enterprises

Today, in China, many companies just focus on their own interests. In order to pursue their immediate interests, they look on all enterprises and departments as their competitors, even the partners and suppliers. They have a weak awareness of cooperation (Zhao et al, 2008), they just want to use the others or gain the best interests from the others. This is obviously incompatible with the basic idea of supply chain management.

Low level of management

Li and Li (2008) found that, compared with advanced countries, Chinese enterprises have a low level of management and the management infrastructure also has numerous problems. According Quer et al. (2007), there are a number of reasons that have led to low levels of management in Chinese enterprises, such as the short history of the Chinese market economy, and lack of a complete operational mechanism in a market economy. The most important reason is that many senior managers of Chinese enterprises lack modern management thinking and innovation, so they do not pay attention to introducing advanced management methods.

The information system is incomplete. Picot et al. (2008) argued that a complete information system can promote the information exchange. An effective information system is the key for every enterprise which wants to implement the VMI system. At present, in China, information technology systems are generally incomplete. There might be two reasons that have caused this situation. The first reason is the internal issues, such as the infrastructure being weak; also, management level is low and there is a of lack professional and technical personnel. The second reason that there are very few successful cases of application of VMI in China is that Chinese VMI software production enterprises cannot really optimize customer's inventory management processes (Xiao and Chen, 2007). Introducing the foreign advanced VMI software is difficult for most Chinese enterprises; because most enterprises need to do a lot of work on the infrastructure in order to use the system. Moreover, the price of foreign advanced VMI production is relatively high. At present, in China, only Lenovo, Huawei (He and Chen, 2008), Haier (Wu et al., 2006) and other high-end-large-scale enterprises have the strength to introduce advanced foreign VMI software.

2.6 Risks in VMI implementation

There are very few people who will doubt VMI theory and the programs related to it. However, it is a difficult job to successfully implement these programs. The costs to set up a VMI program are nontrivial (Harrison et al. 2003). There are two aspects to the program: the investments in information systems and frequently external resources including consultants or system integrators. The systems are also managed by internal expertise as required. Besides, the supplier may take a one-time hit in sales revenue as excess stock is withdrawn from the supply chain.

Harrison et al. (2003) also argued that the organizational challenges are more daunting than the costs, Vigtil (2007) stated that the risk in implementing VMI is mainly from two aspects: one is the forecast errors and fluctuations of market demand which lead to inventories rising and expiration, another one is that the suppliers do not replenish in time, which results in supply disruptions. Job functions, processes, and performance measurements all need to change. The roles of buyers and sales people in new environments also have to be addressed. Compensation systems should be developed which reward employees on the basis of common performance measures is necessary. Trust must be established in what once may have been an adversarial relationship (van Weele et al., 2008). A comfortable environment is necessary when the distributor shares proprietary data with the supplier. The distributor must also trust the supplier to manage inventories in both sides' best interests. Webster (2008) argued that they must work out the rules of the relationship, including inventory ownership, financial terms, goals of inventory and service and the costs division and program benefits. The supplier has to possess and demonstrate the expertise of inventory management. The distributor must discuss with the supplier any promotions, event, or large changes in the customer base. In addition, since the inventory management is moved up the supply chain (Yao et al., 2007) some valuable information may be lost. In order to validate the EDI or Internet data exchange (Potter et al., 2007), extensive testing should be done. Both of the parties should know that the programs need time, so do the committed senior management and strong program management.

From the characteristics of VMI, there are also some risks or hidden dangers when enterprise implement VMI. Firstly, in general, an enterprise has not only one supplier, some large enterprises such as Toyota (Sako, 2004), have thousands of suppliers; if each supplier manages their own inventory, and rents a different size warehouse area, this will not be conducive to supplier management, and will cause unnecessary waste of resources. Secondly, most enterprises' information systems are different, so it is difficult to be compatible with each other, thereby creating difficulties in data management. Enterprises and suppliers will invest significant time and effort in data management, so transaction costs will be greatly enhanced. Thirdly, with VMI, enterprises are more dependent upon suppliers, because, in general, VMI will integrate suppliers and only select the one or some of the best suppliers. Therefore, once the present suppliers have the issues, customer will use back-up suppliers, which may waste time; so the risks of the customer will increase, especially in the case of exclusive supply. Finally, there is the issue of trade secrets. VMI suppliers have close cooperation with an enterprise, so they understand the production plans and sales plans of that enterprise. These suppliers sometimes also do business with the enterprise's competitors; if trade secrets are betrayed to competitors, the enterprise will suffer losses. Contracts and confidentiality agreements are limited and are unable to prevent these situations. The key is mutual trust; only on the basis of mutual trust can the advantages of VMI be realized. Enterprises must create a win-win relationship, allowing suppliers to become beneficiaries, in order to better implement VMI.

2.7 Conclusion

In brief, VMI is the supplier putting the products in the customer's warehouse. Before the product is consumed, it belongs to the supplier. For the customer, VMI reduces inventory costs; for the supplier, VMI brings both advantages and disadvantages. In actual operation, VMI sets stock minimum and maximum levels; suppliers have to maintain inventory levels ranging between the minimum and maximum levels. When demand is high and there is stability, VMI is a good model, because it simplifies the operational processes surrounding a series of orders, supplier's inventory turnover is also good; however, when demand is low and there is instability, inventory levels will frequently fall below the minimum level even zero, affecting the customer, or inventory will overstock, affecting the supplier's inventory turnover.

With VMI, customers generally have certain responsibilities; for example, they are responsible for part of the inventory. And, of course, if the customer has more power, their risks are fewer. For the suppliers, a VMI inventory is customer-specific; it cannot be used to support other customers, thereby it reduces the utilization of supplier's inventory. However, the advantage is they can better understand the customer's consumption and this is conducive to maintaining market share. In addition, VMI may also reduce the volatility caused by large orders.

In summary, it must be noted that VMI is a two-edged sword. In practice, VMI can easily become a new way that strong enterprise squeezes suppliers, such as setting too high minimum and maximum level, forcing suppliers to take on more risk. However, if VMI is on the basis of equality and mutual benefit, it can reduce the overall supply chain inventory, thereby reducing the total costs of the entire supply chain, to achieve a win-win situation.

Chapter 3. Research Methodology
3.1 Introduction

Methodology is very important in any research. Methodology is basically how a researcher is going to go about her or his research (Lee and Lings, 2008). Jankowicz (2005) stated that methodology is the analysis of, and rationale for, the particular method or methods used in a given study, and in that type of study in general.

In order to collect the information or data for this research, based on the objectives outlined in chapter 1, phenomenology was adopted as philosophy. The author also employed an inductive approach and qualitative research method, using both primary and secondary data. This research selected a Chinese food company -- Henan Shuanghui Industry Group CO., Ltd, as well as their supplier, adopting a case study research strategy. The research utilizes in-depth e-mail and telephone interviews to collect qualitative data from a director and warehouse manager in the Shuanghui Group and an employee of the supplier. The case study limitations and research ethics are presented at the end of the chapter.

3.2 Research philosophy

Saunders et al. (2009) argue that the point is that precisely what you are doing when embarking on research is developing knowledge in a particular field. The knowledge development you are embarking upon may not be as dramatic as a new theory of human motivation.

The research philosophy you adopt contains important assumption about how you view the world. These assumptions will underpin your research strategy and the methods you choose. As Johnson and Clark (2006) note, as business and management researchers we have to make strategic choices in our research, because it not only aims for what we do, but also it helps us to understand that the issue should be investigated and have a significant impact on commitment to the philosophy knowledge.

According to Saunders et al. (2003), there are two main research philosophies, as follows:

3.2.1 Positivism

Positivism emphasizes sensory experience. The central argument of positivism lies in that the fact must be through observation or sensory experience in order to understand the external environment. If your research reflects the philosophy of positivism then you will probably adopt the philosophical stance of the natural scientist. You will prefer ‘working with an observable social reality and that the end product of such research can be law-like generalizations similar to those produced by the physical and natural scientists' (Remenyi et al. 1998:32)

3.2.2 Phenomenology

Phenomenology is a descriptive, interpretative approach to study human experiences and consciousness (Hair et al. 2007). Phenomenological studies examine conscious experiences from the first person point of view, and ranges from experiences involving perceptions, thoughts, desires, memories, emotions and imagination to bodily awareness and social interactions.

This research adopted the philosophy of phenomenology method, examining directly knowledge and experiences to research and analyzes the object. Phenomenology as a term is now used in many different ways-sometimes correctly and sometimes not – but it essentially refers to the study of human experiences and of the structures within which humans experience the world (Hammersley, 2004)

3.3 Research approach

According to Saunders et al. (2009), there are two research approaches: the inductive and the deductive approach. Both the inductive and deductive processes are applied in scientific investigations. Theories based on induction and deductions help us to understand, explain, and/or predict business phenomena.

3.3.1 Deduction is basically the process of drawing conclusions from rational and logical principles. In terms of logic, a valid argument is one in which there is no situation where the principles (which are called premises) are true and the conclusion is not true, and this is a good place to start talking about research. Ghauri and Grønhaug (2005) considered that the deductive approach is often associated with quantitative data.

3.3.2 Induction is essentially the opposite of deduction. It is the process of moving from specific observations to a more general theory. It is a process where we observe certain phenomena and, on this basis, arrive at conclusions. In other words, in induction we logically establish a general proposition based on observed or particular facts. Ghauri and Grønhaug (2005) considered that the inductive approach is often associated with qualitative data.

The concept of VMI was defined in accordance with that in the literature reviewed. The author's intention was not to test the validity of this concept; on the contrary, the author's attempt was to discover how the Shuanghui Group could better implement the VMI strategy. In order to gain a deeper understanding of this research topic, the inductive approach was applied. The author designed and improved the study scope process, set objectives according to the existing literature. The limited amounts of quantitative literature also mean the inductive approach was more appropriate for this research.

3.4 Research strategy

Saunders et al. (2009) consider that there are seven different research strategies:

Ÿ Case study;

Ÿ Ethnography;

Ÿ Archival research;

Ÿ Grounded theory;

Ÿ Survey;

Ÿ Experiment;

Ÿ Action research.

Robinson (2002:178) defines case study as ‘a strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence'. Yin (2009) also stressed the importance of context, and added that within a case study, the boundaries are not clearly evident between the phenomenon being studied and the context within which it is being studied.

The case study strategy particularly interests researchers who want to have a rich understanding of the context of the research and the processes being developed (Morris and Wood, 1991). Collis and Hussey (2009) argued that case study strategy also has considerable ability to generate answers to the question ‘why?' as well as to the ‘what?' and ‘how?' questions, although ‘what?' and ‘how?' questions tend to be more the concern of the survey strategy.

In a single case study, a researcher may choose a special case, or to be interested in this case; this would be an “intrinsic case.” For example, a researcher might want to know how a system is implemented in a specific enterprise, so the researcher can choose this enterprise as a case. If the researcher focuses on a specific issue, the case must illustrate that issue; this is an “instrumental case.” (Miller and Salkind, 2002). If the researcher uses multiple case studies or “collective case study”, the cases are described and compared. Multiple case studies are often used to solve a particular problem or issue;for example, to contrast the situation of a system implemented in several enterprises, the researcher could use these enterprises as the case, find out and analyze the differences.

Several limitations of the case study methodology have been noted. First, it is difficult to summarize findings; because the case study is summarized in an analytical, not statistical way, there can be with the arbitrariness and subjectivity in analysis and summary. The second limitation is technical limitations and researcher bias. Case study does not have a standardized data analysis method, the evidence presented and data analyzed will have divergence and biases of the researcher, which will affect the data analysis results. Finally, case study takes a lot of time and manpower.

3.5 Research methods
3.5.1 Quantitative method

“Quantitative” is predominantly used as a synonym for any data collection technique or data analysis procedure that generates or uses numerical data. Quantitative analysis is mainly used to collect quantifiable data or information, then to test and analyze the quantitative data to gain a meaningful result. Quantitative analysis is carried out according to some standard to determine the characteristic of the research object, or calculate the quantitative variation in some factors. The types of quantitative research include interview surveys, self-completion questionnaires and so on (Nick, 2000).

3.5.2 Qualitative method

“Qualitative” is used predominantly as a synonym for any data collection technique or data analysis procedure that generates or uses non-numerical data. The characteristics of qualitative research include the exploratory, diagnostic, and predictive. It does not numerically pursue accurate result, but only to understand the issue; gain the knowledge. The qualitative method is based on specific phenomena to study fundamental problems. It is generally based on a recognized axiom, using historical facts and relevant literature to describe, interpret and analyze the object of study. The aim of quantitative research is to use in-depth interview for deeper analysis and discussion. Quantitative research is the way that the researcher uses to define issues or solve the problems. Some qualitative research collects data from individuals. In-depth interviews and semi-structured are used to explore issues outside the tight constraints of a structured interview survey (Nick, 2000).

A case study is a research process that provides an in-depth description of a particular situation, program, event, or activity. Any individual or group may also be an object or objects of study. A case study may involve one or more cases; either way, the object of study is a “bounded system” (Miller and Salkind, 2002) where the boundaries might be time and place. A qualitative case study, described literary technique and opposed to quantitative, analyzes a situation, when measurements are involved (Wilson, 1979).

According to the Saunders et al. (2009), the advantage of in-depth interview is to explore relatively in depth and more of the content of a topic. The in-depth interview is one to one, this can eliminate the group pressure, so researcher and interviewee can exchange information more freely. One to one communication makes interviewees feel that they are the focus, so they might find it easier to put forward their ideas. There are two forms of interview: informant interview and respondent interview.

It is the interviewee that dominant interview in informant interview. In contrast, in respondent interview, it is the interviewer that dominant the interview and the interviewee just answer the questions. The respondent interview has been adopted in this research. However the interviewer needs to pay attention to ensure that the data obtained is relevant to the object of study. Another problem is data replication (Saunders et al., 2009).

The in-depth interview also has some limitations. Researchers may not be able to determine whether the interviewee who selected is appropriate for the research. The in-depth interview has strict requirement to researcher and interview questions. Some high level interviewees are difficult to contact, therefore, for some questions it is difficult to obtain answers. Furthermore, because the in-depth interview demands a lot of time and energy, thus the number of interviews can be very limited in the research project.

3.6 Data collection

3.6.1 Primary research

Primary data are data generated from an original source, such as peoples own experiments, questionnaire surveys, interviews or focus groups (Collis and Hussy, 2009)

Usually, if the secondary data are not available or cannot help answer the research questions, researchers must themselves collect the data that are relevant to their particular study and research problem. The main advantage of primary data is they are more consistent with a particular research question and research objectives. The main disadvantage is that collecting primary data demands much time and effort, and target enterprises or companies may be unwilling to cooperate and answer the questions. Normally, collecting primary data involves observations, experiments, surveys or interviews (Ghauri and Grønhaug, 2005).

In this research, the in-depth interview approach has been used. The research question is related to management. Thereby, the author chose not to use questionnaire but to collect qualitative data through e-mail and telephone interview because author could not visit the company in question. Interview Design

The aim of a qualitative research interview is describe and the meanings of central themes in the life world of the subjects. The main task of the interviewer is to understand what the interviewee has said (Kvale, 1996). A qualitative research interview is designed to cover the facts and a level of significance, but it is usually more difficult to sense the level of interview. (Kvale, 1996)

Interviews are very useful for gathering inside information and learning about the interviewees' experiences. The interviewer can pursue in-depth information around the topic. Interviews can also be useful as follow-up to investigate some respondents. (McNamara, 1999)

An in-depth interview is an unstructured one to one discussion session between a trained interviewer and a responder. Respondents are usually chosen carefully because they have some specialized insight.

First of all, the present author used e-mail to contact the Shuanghui Group's director and explained to him the purpose of this research. The director agreed to the interview and recommend warehouse manager to the author, the warehouse manager was responsible for answering the more specific questions. At the same time, the author contacted an employee from supplier. The employee could help the author gain a deeper understanding of the VMI operation between the Shuanghui Group and the SH supplier.

3.6.2 Secondary research

Secondary data is that collected from an existing source, such as the Internet, databases internal records, and publications (Collis and Hussy, 2009). The main advantage of secondary data is it saves resources, especially time and money (Ghauri and Grønhaug.2005). In general, it is much easier to use secondary data than to collect the data oneself.

In this research, the author collected secondary data from the book, journals and articles. Secondary data collection can be from a wide range of sources. The secondary data also includes some sources from the library, as well as website.

The secondary research gives the author the information necessary to formulate the research questions for the primary research, and most importantly it provides the invaluable cultural and historical contexts that facilitate the analysis and understanding that interviewees' idea (Saunders et al. 2009).

3.7 Limitations of the research

According to Collis and Hussy (2009) and Saunders et al. (2009), there are three limitations in case study and interview research. These are: reliability, validity and generalizability.


Reliability is concerned with the findings of the research and is one aspect of the credibility of the findings; the other is validity. A researcher needs to ask whether the evidence and his or her conclusions will stand up to close scrutiny (Raimond, 1993).

Saunders et al. (2009) argue that the interviewee may, in principle, be willing to participate but may, nevertheless, be sensitive to some of the themes of unstructured exploration. Hence, the respondent can choose not to reveal and discuss a theme, the interviewer wanted to explore, because it will lead to acute problems concerning sensitive information they do not want, or are not authorized, to discuss with you.


Validity is the extent to which the research findings accurately reflect the phenomena under study. They should be accurate, reflecting the information present in the data in an unbiased way. This is often established by seeing whether the information is consistent with other measurement methods, or with what is known and recorded already. ‘An effect or test is valid if it demonstrates or measures what the researcher thinks or claims it does' (Coolican, 1992, P35). Threats to validity include history, testing, instrumentation, mortality, maturation and ambiguity about causal direction (Saunders et al., 2009). Research errors, such as faulty research procedures, poor samples and inaccurate or misleading measurement, can undermine validity.


Generalizability is concerned with the application of research results to cases or situations beyond those examined in the study. Generalizability is ‘the extent to which you can come to conclusions about one thing (often a population) based on information about another (often a sample)' (Vogt, 1993, P99).

3.8 Ethical issues

Voluntary participation

One of the most important ethical principles is that a researcher should not force people to participate in the research. In academic research, it is also advisable to avoid offering financial or other material rewards to induce people to take part, as this will lead to biased results.

Anonymity and Confidentiality

In principle, researchers should offer anonymity and confidentially to all the participants in their research. Giving participants the opportunity to remain anonymous means assuring them that they will not be identified with any of the opinions they express. In interviews, it encourages greater freedom of expression and more open responses.

The ability to explore data or to seek explanations through interview-based techniques means that there will be greater scope for ethical issues to arise in this form of research (Easterby-Smith et al, 2008)

Before the interview, the present author guaranteed to the interviewees that their privacy would be maintained and they would not be forced to reveal some confidential company information. At the same time, due to the requirement of the supplier, the author will not disclose the name of the supplier, or the interviewee's position, the terms ‘SH supplier' and ‘interviewer C' are used instead. In China, people do not like to be they have been exposed, especially those in high positions. Therefore, to avoid causing embarrassment, the two interviewees are introduced as the director and warehouse manager. Furthermore, the author felt it not appropriate to reveal further details, such as where was their company specifically located as that might enable the identification of individual respondents. Therefore, through every stage of the research, all private information about the three interviewees was kept safely.

3.9 Summary

In this chapter, the author has presented the research philosophy, research approach, research strategy, research methods, and data collection methods. Phenomenology is the research philosophy adopted and the inductive approach was used. The author uses primary data and secondary data, qualitative data being collected from interview. The author utilized several ways in data collection: in-depth interview, journals, books and articles, as well as library and internet. Research limitation and ethical issues were also addressed at the end of chapter. Ethical issues are very important for research, because all data collection is related to ethical issues. The most important issue in this research was to guarantee interviewees anonymity and confidentiality. In summary, this chapter presented the fundamental guide to this topic and makes sure this research to be able to achieve the objectives.

Chapter 4 Findings

4.1. Introduction

This chapter includes the findings from the case company about the research question.

There were three interviewees, two of them from the Shuanghui Group, one is the director of supply chain department, the other one the warehouse manager, and the third one is from the SH supplier. The author chose them because they can consider the questions from different perspectives. In other words, the author could gain some ideas, whether macro or micro, so the author could make a more comprehensive analysis of the issues.

4.2. Findings about the general situation in the Shuanghui Group.

The Shuanghui Group had a short-term contract with their supplier, if the performance of the SH supplier meet the contract requirements, the Shuanghui Group would sign a long-term contract with the supplier. The contract specified the Shuanghui Group could just use this one supplier's canning jar. The Shuanghui Group set up a VMI warehouse in the factory, the SH supplier replenishing the warehouse twice a week.

Normally the Shuanghui Group did not place orders with the SH supplier, and there was no required delivery data; the SH supplier needed to replenish the VMI warehouse twice a week, according to the demand information and sales records from the Shuanghui Group. Quantity and timing of replenishment were decided by the SH supplier. However, according to the contract, the Shuanghui Group set up the minimum and maximum level, the SH Supplier had to ensure that the VMI warehouse kept the required level.

The Shuanghui Group did not need to stock the canning jar in their warehouse, when their production lines needed canning jars they would collect them from the VMI warehouse; then both sides would bill once a month, depending on pickup records.

According to what the director said, the relationship between Shuanghui Group and their supplier was just a “buyer-seller relationship”. The only special thing is “Shuanghui Group is an important customer of the supplier”, the director said. Therefore, the SH supplier had the corresponding operational staff. In addition, the Shuanghui Group also had the full decision-making power. They had the right to interfere in the quantity of the purchasing and the trading methods. In terms of systems, both of the Shuanghui Group and the SH supplier had their own internal ERP system, but, according to the director, “they are not compatible with each other”.

4.2. Answers on the Effects of VMI

4.2.1. Why implement a VMI System?

The core idea of VMI is to address the inventory problems of the entire supply chain. Inventory takes up a lot of liquidity. It affects the turnover efficiency of the enterprise's funds. For a long time, the inventory in the supply chain has been fragmented. Each process in the supply chain has its own inventory control strategy, and manages its own inventory by itself. Because the customer's inventory strategies and the supplier's are different, so this will “inevitably produce errors in demands”, that formed the “bullwhip effect” in the supply chain as happened in the case study, which increased the risk to the inventory and supply. The reason why the Shuanghui Group implemented VMI was to eliminate the “bullwhip effect”.

From the interview with the director, the author could clearly understand the Shuanghui Group's expectations:

Ÿ Reduce the inventory level;

Ÿ Optimize the business processes; reduce internal operational costs;

Ÿ Increase cash flow to make financial profits;

Ÿ Reduce the costs of purchase orders, invoices, payments, transportation, receipt and other transactions;

Ÿ Establish a closer relationship with suppliers, and increase the responsiveness of demand.

VMI has brought a range of benefits to the Shuanghui Group, such as to “reduce inventory, and increase sales”, “reduce the number of orders, reduce the inventory cost”, and “enhance the service level”. However, there have also been many constraints and obstacles in the actual implementation and application. Because of the antagonistic relations between the Shuanghui Group and the SH supplier, as well as the different system and operation, it was difficult for them to have a better cooperation.

On the other hand, the SH supplier considered that cooperation with the Shuanghui Group could promote development of their company. Regarding the short-term benefits: “we can better understand market information, optimize our transportation, and we can also raise our awareness with this well-known brand” interviewee C side. Furthermore, if the SH supplier could meet the requirements according to the contract, they can establish long-term partnership with the Shuanghui Group. Overall, the “SH supplier focus on the long-term interests”, interviewee C said.

4.2.2. The effects of VMI on Administration

Under the VMI system, the order processes became easier because the system could get rid of many cumbersome steps and accelerates the response speed. In the traditional way, place orders, purchasing requirements, submitting quotations and purchase occupied a lot of time in the whole cycle. When the VMI system was used, the Shuanghui Group did not place orders with the supplier, just arranged vehicles to pick up canning jars according to needs, and safely and efficiently ship them.

With the support of VMI system, forecast processes became more accurate and timely. Using the VMI system had shortened forecast time. The forecast period of goods shipment had been moved up one month, and the forecast accuracy also increased to 98%. At the same time, the delivery speed of the suppliers became faster and the communication between warehouse managers, distribution staff and drivers became more simple and faster, as well as the process of signing documents, thus saving turnover time. At the same time, interviewee C told the author that after implementation of VMI, “workload has increased”, because now they “assume more ordering process”.

4.2.3. The effects of VMI on Inventory Level

The effects on inventory level are obvious. Due to the supplier's participation in managing inventory, the Shuanghui Group's inventory level had a significant reduction. The VMI system optimized inventory management because it simplifies the procurement processes and saves the procurement time. Based on forecast or actual demands, the replenishment became more efficient and flexible. As warehouse manager said, using VMI, they are “not worried the canning jar will be out of stock,” so they can “produce canned meat completely according to the production plan”

However, through the interview with interviewee C, the author could see that the supplier's inventory has increased. The interviewee C said that they “had to accumulate a large number of goods in preparation for the immediate needs of the Shuanghui Group” and to “ensure the continuous replenishment of the VMI warehouse”. Therefore, a lot of canning jars had piled up in their warehouse; this would result in waste and the Shuanghui Group was not responsible for it at all. That sets a barrier against the continuing development of VMI in the future.

4.2.4. The effects of VMI on service level.

The interviewee C said they have more experienced, and more professional in managing their own products so that they could reduce the errors of replenishment, and the wrong goods delivery as well. The SH supplier could also provide a range of services including software, expertise, logistics equipment and staff training. Therefore, that means the service level of Shuanghui Group could be improved with the help of the VMI system; it was manifestly obvious it “accelerated the speed of customer service responding, and can promptly resolve the problems from upstream and downstream”(according to the warehouse manager).

Implementation of VMI could promote exchange of information, which resulted in the SH supplier being able to collect more information about customer demand and inventory level from the Shuanghui Group. Interviewee C acknowledged that understanding such information had helped them to provide a better service to the Shuanghui Group, achieve continuous replenishment and reduce the risk of stock out, in order to ensure smooth production in the Shuanghui Group.

4.2.5. The effects of VMI on production

With VMI, because the SH supplier can continually provide the canning jars, the Shuanghui Group's production was smoother. The production process was free from the interference of accidents. The director told the author they could “make more flexible production plans,” and “the ability to cope with unexpected issues also increased”. The warehouse manager also saide, they could provide more information to their supplier, for supplier to make more accurate forecasts, and optimize their production plan.

It is interesting that the SH supplier did not feel that they could fully optimize their production process. As interviewee C said, “Occasionally, information transmission will still delayed, which led to trouble in production”, therefore, in order to prevent this situation, the SH supplier would still “produce the extra canned jars, in order to ensure that doesn't affect the production of the Shuanghui Group”

4.2.6. The effect of VMI on transportation

Because the VMI warehouse was set up in the Shuanghui Group's factory, compared with before implementing VMI, the transportation of the Shuanghui Group had became more flexible and more convenient. The SH Supplier had also benefits from VMI. They could make a better delivery plan based on VMI information; previously, they would arrange transport when they received orders; the result was that they cannot make full use of truckload. Today, they can better developed transport routes and arrange a reasonable delivery plan, and maximize the use of truckload, thereby reducing the costs.

4.3. Summary

The Shuanghui Group did get some benefits from VMI, such as reduced inventory level, improved service level, and optimization of production process. The Shuanghui Group's cooperation with the supplier not only promoted the exchanges between the enterprises and suppliers, but also reduced the cost of purchase orders, invoices, payments, transportation and receiving. From the perspective of the Shuanghui Group, they had achieved the desired results. However, for the SH Supplier it was a bittersweet result. Service levels and transportation costs were achieved as desired, but the inventory level increased. Sometimes the supplier could not gain access to information in time maybe the reason for these issues.

The following form will give an view of the impact of VMI on both sides

Administration cost

Inventory level

Service level


Transportation cost



Supply chain

Chapter 5 Analysis and discussion

5.1 Administration

The administration costs include order process costs, forecasting costs and investments costs. These costs are for the communication between two companies. In the following sections, the author will analyze how the VMI affected these costs.

5.1.1 Order processing costs

One of the main advantages of VMI is that it can simplify the order process, and eliminate the duplication of operations in the supply chain. Before implementing VMI, the Shuanghui Group's Information Processing Center was responsible for orders management. Today, the SH supplier is responsible for the orders management, and it is automatically confirmed by the Shuanghui Group's ERP system. This has greatly reduces the administrative work at the Shuanghui Group. This finding is in accordance with statements by Aichlmayr (2000); Kumar et al (2003), who stated that with VMI, the customer can significantly reduce the administration, hence, reduce these costs. According to Pholen and Goldsby (2003), implementing VMI will increase the administrative work for the supplier. The SH supplier took over the ordering process from the Shuanghui Group, and thus bears a greater workload. Therefore, the Shuanghui Group could reduce the order processing costs. Pohlen and Goldsby (2003) also argued a company which does not use VMI will have higher order processing costs than a company which uses VMI.

5.1.2 Forecasting costs

VMI can enhance the supplier's forecasting process. In this research, the forecasting costs of the SH supplier increased. This increase came from a new and beneficial way of working. The Shuanghui Group provided more information about sales and demand to the supplier, which could help the supplier analyze and adjust the forecast, reducing the forecasting error. Thereby decrease forecasting costs.

5.1.3 Communication Investment

The Shuanghui Group provided VMI information to their supplier via ERP, therefore, the supplier had to able to receive VMI information from ERP. In this case, the Shuanghui Group was developing its own ERP system, and the information systems were not compatible with each other. Therefore, this requires both the Shuanghui Group and the supplier to invest in order to ensure the smooth exchange of VMI information.

The author also recommends that the SH supplier invest in VMI, especially in an information system. Harrison et al. (2003) stated that the cost of investing in the VMI is nontrivial; however, according to Waller et al. (1999) and Lee (2004), VMI can help a supplier make better production plans and reduce transportation costs, and, importantly, the SH supplier in the present research could establish a long trustworthy relationship with the Shuanghui Group, resulting in more loyal customers and secured sales. This is also in accordance to the results with Vergin and Barr, (1999), and Xu et al. (2001).

By evaluation of the literature in chapter 2, the author recognized that the Shuanghui Group struggling with an incomplete information system. According to Barratt (2004a), information is a key to success in implementing VMI. Waller et al. (1999) also stated that trust to the transparent information is critical in a successful VMI relationship. The Shuanghui Group implied that occasionally the VMI information indicated that the supplier needed to replenish the inventory when it actually was at an appropriate level. This is unacceptable. The Shuanghui Group must investigate this problem and solve it. However, the author would like to emphasize that through the VMI information, the supplier can be aware of this issue; they understand the product inventory level and demand of VMI warehouse. Thanks to the VMI information, the supplier can analyze what has caused this unexpected information. In the traditional customer-supplier relationship, these unexpected orders would never be detected, and would be delivered as emergency orders. These would cause obstruction in the production planning, which would result in high set up costs and low productivity.

5.2 Inventory

The Shuanghui Group realized that the best way to reduce supply chain costs was to reduce the inventory levels. According to Waller et al. (1999), VMI is a good strategy to reduce the customer and supplier's inventory levels. VMI can improve the information flow; with the improvement of information flow, the inventory level will be reduced. Lapide's findings (2001) indicate that a customer's inventory levels are reduced due to lower safety stock; this is all because of the implementation of VMI. This is also in accordance with the Hines et al.'s (2000) finding.

5.2.1 Shuanghui Inventory

Inventory levels were reduced at the Shuanghui Group; because the SH supplier monitored and managed the inventory for the Shuanghui Group, it could accelerate the respond speed for customer demand changes. The SH supplier used the daily sales data or demand information provided by the Shunghui Group to manage the inventory, place orders or continuously replenish for the Shuanghui Group. From the Shuanghui Group's official website, the author collected the inventory information shows, Shuanghui Group's inventory level significantly reduced from an average 4-5 days to approximately 2 days; this information proved that the main benefit of VMI is that it can reduce the inventory level and optimize inventory management. This is in accordance with the statement by Waller et al. (1999), Cetinkaya and Lee (2000), Lysons and Gillinghan (2003)

5.2.2 Supplier Inventory

According to Waller et al. (1999), the supplier will no longer be required to store the inventory exceeds demand in VMI relationship. This is because there are better information flows between customer and supplier. Customers provide more accurate information about the demand and inventory levels at the VMI warehouse, suppliers use this information for more accurate forecasting and to make a better production plan, which results in their only needing to produce the products needed, thereby also reducing their own inventory levels.

However, in practice, the inventory levels of the SH supplier had not decreased as expected; conversely, the inventory increased after implementing VMI. Through the evaluation of literature in chapter 2 and the interview it could be detected that there are two possible issues casing the increased inventory levels of suppliers: technical issues and cultural issues.

First, the information system between the Shuanghui Group and the supplier was still not complete. Holmström (1998) believed an effective information system can be divided to two sub-categories: information technology and integrated production system. Peterson et al. (2005) stated that information was broken down into: information sharing, availability, completeness and reliability. In this case, the Shuanghui Group's ERP system was “not compatible with” supplier's ERP system, which may have brought the obstacles in the communication between the Shuanghui Group and the suppliers. Picot et al. (2008) stated that a complete information system can better implement VMI. In other words, an incomplete information system will constrain the implementation of VMI. In this case, due to the incomplete information systems, sometimes the SH supplier could not collect the accurate information in time, so they had to stock more inventories to ensure a smooth replenishment of the Shuanghui Group's VMI warehouse. This led to increased inventory levels at the supplier.

A second issue is cultural issues. In China, most companies cannot fully trust their partners; the Shuanghui Group is no exception. According to Barratt, the VMI relationship needs mutual interdependency, openness, trust, honesty, chemistry between both partners; Duchessi et al also argued consistent target and benefit-sharing are the necessary conditions of implementation of VMI. In China, a lot of companies especially large-scale companies, blindly pursue their own interests, while ignoring the interest of suppliers; they lack a win-win concept, blindly using their strong position to force the supplier to fully assume the inventory costs. This situation makes the implementation of VMI enter the wrong path, making it impossible to optimize the entire supply chain. On the other hand, in order to establish a long-term cooperative relationship with the Shuanghui Group, the SH supplier was usually willing to sacrifice their own interests to ensure the replenishment of the Shuanghui Group's VMI warehouse; this also led to increased inventory levels at the supplier.

From the above discussion, the author acknowledges that a complete information system and a good relationship is very important to implementation of VMI, this is in accordance with Barratt (2004), Peterson et al. (2005) and Claassen et al (2008).

5.3 Service level

In order to improve service levels, VMI information must be detailed and accurate. Detailed VMI information contains inventory levels, forecasting and sales. According to Kuk (2004), the VMI will increase the information flow, as well as service levels. Hines et al (2000), Kuk (2004) and Waller et al (1999) also stated that detailed and transparent information is an opportunity for suppliers to increase their service levels to their customer.

According to Christopher (2004), implementation of VMI will reduce risk of stock out in the supply chain. This corresponds with the Shuanghui Group, which indicated SH suppliers improve their service levels can lead to the lower risk of stock out at the VMI warehouse. Disney et al., (2004); Reiner and Trcka, (2004) also studied that VMI could lower risk of stock outs.

Kuk (2004) also stated that, with VMI, a supplier can have a more accurate forecast, based on the information transferred in the VMI relationship. This is in accordance with finding on the Shuanghui Group, which indicated that, after implementation of VMI, their supplier had significantly more accurate forecasts. This can enable suppliers to develop a more flexible and better production plan, thereby improving the service levels. The SH supplier also recognized that through the VMI, they could get more information on customer demands. This accordance with Kuk (2004). According to Hines et al. (2000), after implementation of VMI, the service levels increase very soon. This finding is also confirmed by findings on the Shuanghui Group. The author emphasizes that accurate and transparent information is very important in the VMI; this can help the company achieve an improvement in service level.

However, the author wishes to highlight the same as in the last section analysis: the information system between the Shuanghui Group and their supplier is still incomplete. Although they increased information flow by the VMI relationship, they have not yet fully gained the benefits from the VMI relationship. According to Peterson et al. (2005), information quality is broken down into accuracy, timeliness, completeness, consistency and ease of access. Sometimes, information issues will be an obstacle to the implementation of VMI on both sides.

5.4 Production

One of the main advantages of VMI is accurate and smooth information that will eliminate the bullwhip effect, facilitating the development of more flexible production plans. Waller et al. (1999) stated that under the VMI, supplier's production can be smoother and reduce uncertain demand. This finding is accordance with the view of the SH supplier. The SH supplier also acknowledged that accurate and transparent information to enable them gain valuable consumption information and customer's inventory levels. This can help the supplier understand what and when they need to deliver to the customer. Therefore, they can deliver the right products at the right time to the customer. In the traditional relationship, a supplier can only passively receive customer's order. This makes it difficult for the supplier to develop effective production plans.

According to Lapide (2001), one of the main defects is the supplier not integrating the VMI information into the forecasting process. This will lead to the supplier's products not meeting the actual demand. This will gradually affect the ability of the supplier to improve the production planning. In the present research, due to the limitations of the information system, the SH supplier could not fully integrate the VMI information into their forecasting process. Therefore, according to Lapide (2001), they cannot fully gained benefits from the VMI relationship. The literature shows that if the supplier fully integrates the VMI information into their forecasting process, they can improve their production planning. Therefore, the author recommends the SH supplier develop the information system and fully use transparent information and integrate the VMI information in to their forecasting process.

5.5 Transportation

Gunasekaran (2001) found that the transportation cost is the largest elements in supply chain cost. Therefore, to pay attention to transportation frequency and make full use of truckload is necessary. At the Shuanghui Group, the focus on transportation was to make full use of truckload. In order to make full use of truckload, the supplier must carry out in accordance with the right frequency. Waller et al. (1999) and Lee (2004) founded that VMI can helps the supplier to develop a better plan and optimize their transportation. In other words, VMI is a good strategy to improve the rate of truckloads utilization. VMI can improve information flow and make more accurate transmission of information, which leads to increased in truckloads rate. This is in accordance with the findings from the Shuanghui Group.

According to Waller et al., (1999), because transport frequency changes, this will result in an increase in partly loaded shipments. This finding was not confirmed by the Shuanghui Group. The Shuanghui Group recognized that after implementing VMI, they did not reduce the transportation frequency; because the Shuanghui Group did not cooperate with their supplier in transportation. The Shuanghui Group agrees with Disney and Towill (2003c) that transportation frequency would not change in the short-term. Furthermore, Disney and Towill (2003c) stated that transportation frequency will be decrease in the long-term with VMI. However, the time VMI had been implemented in the Shuanghui Group and by their supplier was relatively short; thus, the author could not verify this finding, so the author that needs to continue to observe and research in the future. This is also one of the limitations of this paper.

5.6 Summary

In this chapter, the author studied the effects of the VMI relationship between the Shuanghui and their supplier from five aspects. These five aspects are: administration, inventory, service level, production and transportation. These five aspects are also the key elements of the total cost concept. The author gained a deeper understanding of VMI through the analysis of these five aspects.

After evaluation and discussion, the author acknowledges that VMI can bring benefits to the Shuanghui Group, such as reduced administration costs, and reduced inventory costs, as well as optimizing the production plan. While for the supplier, VMI may bring long-term benefits to them, because up to now, the SH supplier has not gained the full benefits from VMI, their inventory level having increased due to the incomplete information system. For the same reason, the SH supplier has not fully optimized its production plan. At the same time, the Shuanghui Group is a big company and they only pursue their own interests, so that the SH supplier's interests could not be guaranteed. However, the good news is that the SH supplier believed that with the development of information technology and the closer relationship with the Shuanghiu Group they would get more benefits in the future, the author will also continue to research.

Chapter 6. Conclusion

VMI is an inevitable trend in supply chain management development. VMI can help the enterprises reduce supply chain costs and improve service level (Potter et al, 2007). Compared with customers, suppliers are more experienced and more professional in the management of their own products. Managing inventory by the customers themselves may lead to the wrong products storage and wrong replenishment decision-making. The supplier can provide a range of services to help an enterprise reduce inventory management costs, and the enterprise will also substantially reduce the inventory investment.

At the same time, VMI is derived from supply chain management philosophy and pursues a “win-win” situation (Claassen et al., 2008). It will bring many benefits to both the supplier and the enterprise in the supply chain. VMI allows a supplier to obtain the necessary operational data from the enterprise and get direct access to the real demand information. Suppliers use this information to regulate inventory levels, thereby eliminating the additional costs caused by unexpected short-term demand. At the same time, an enterprise also greatly reduces the requirement for safety stock. On the other hand, VMI can greatly reduce the trading time between supplier and enterprise, thus enabling the supplier to better understand the business activities of the enterprise, then to better meet the enterprise's needs, thereby increasing the flexibility and efficiency throughout the entire supply chain.

Through this study, the author can sum up the following advantages:

For the entire supply chain, due to the supplier's direct management of inventory and the usage of the advanced information technology, VMI can reduce management costs, increase the sales, and reduce human error.

For the customer, such as the Shuanghui Group, VMI brings many benefits. For example, under the agreement, the supplier helps the Shuanghui Group manage the inventory, share the pressure of stocks and replenish in timely in accordance with customers' demand. Therefore, the Shuanghui Group could reduce the number of orders as well as the inventory costs. Because of the timely replenishment from the supplier, the Shuanghui Group had a manifest reduction in the situation of stock out, thus to enhancing sales and improving service levels.

Although VMI had brought many benefits to the Shuanghui Group, in practice, it was still limited by some conditions. First of all, VMI's success depends on the relationship between the supplier and enterprise. It is easy for a powerful enterprise, such as the Shuanghui Group, to make VMI into another way to squeeze suppliers by setting the too high minimum or maximum level of inventory and to force the supplier to shoulder more risks.

At the same time, the successful implementation of VMI means increasing dependence on each other. If both parties lack integrity and cannot fully exchange the information, the data will result in inventory chaos or inventory imbalances. This is the reason why the supplier's inventory level, in this case, increased.

VMI allows the inventory decision-making power distracts to upstream supply chain member supplier, and requires the downstream member provide adequate and transparent information to suppliers. According to information, suppliers can make a timely and accurately replenishment plan. This relationship must be based on trust; without this basis, VMI cannot be successfully implemented.

In addition, the information system is also very important to VMI cooperation. A complete information system can improve the communication between the supplier and enterprise. In other words, incompleted information system will baffle the information exchange between them. In this case, the Shuanghui Group's ERP system and the supplier's system were not compatible. So there often existed some problems in the cooperation between the Shuanghui Group and the suppliers, such as goods loss, goods being unloaded in the wrong place, quantity error, and other goods damage problems.

To summaries: the necessary conditions to implement VMI are a good relationship and a complete information system.

6.1 Recommendation

After the analysis of the development, the application and the plight of VMI in the Shuanghui Group, it should be noted that there exists both opportunities and challenges regarding VMI in the Shuanghui Group. How to grasp opportunities, meet challenges and implement VMI in a proper way to enhance the competitiveness of enterprise is very important. The Shuanghui Group should improve from in the following points:

They should establish the co-operational inventory management mode between enterprise and supplier in the supply chain, strengthen the cooperation relationship between the Shuanghui Group and the supplier and improve cooperative efficiency. Getting rid of inventory management cooperation in the supply chain is only subject to a short-term interest of strong enterprise. What is more, they should also avoid a fragmented inventory management form. At the same time, the implementation of VMI also put forward a new requirement for the Shuanghiu Group's internal environment and external environment. The implementation of VMI is a reorganization of an enterprise's internal and external processes. It involves almost all sectors in the enterprise; this requires the Shuanghui Group to be able to change their concepts and achieve cooperation cross-sector or cross-enterprise.

They should also regulate the trust mechanisms for every member of the supply chain. Aiming at maximizing the overall interests of the supply chain, they should establish a “win-win” relationship and abandon the behaviour that strong enterprises always rely on their strength to squeeze the weak on price, cost and risks in the supply chain, which may have resulted in the increase in the overall supply chain costs and the decline in competitiveness.

According to development characteristics of VMI, the corresponding software should be developed. For example, Midea Group (He et al., 2008) built a direct delivery platform with its suppliers based on the original ERP system. Suppliers can check the content of Midea Group's order, such as variety, type, quantity and delivery time, in their own business locations. Suppliers do not need to install the ERP system, but need to log into the Midea Group's page on the Internet. This indicates that from the perspectives of financial savings and resource utilization, after appropriate improvement, it is entirely possible for enterprises to provide software support for the implementation of VMI for themselves, which means there is no need to rely on expensive foreign VMI software.

Relevant policies and supporting. With China joining the WTO and foreign capital pouring in, logistics operations tend to be developing more efficiently and diversely. A lot of new technologies and new concepts have been introduced to China, which will require the Chinese government and enterprises to adapt to the needs of development, constantly explore new ideas, draft the relevant administrative rules and regulations to support the development and promote the development of productive forces.

6.2 Ethical issues

Ethics cannot be ignored because it is a very important issue in research. It appears throughout the whole process of research, including data collection and data analysis. Keeping interviewees' details confidential and anonymous was one of the most important issues. Before the interview, the author guaranteed to the interviewees that their privacy would be maintained and they would not be forced to reveal any confidential information of the company. Therefore, to avoid causing embarrassment, the three interviewees are introduced as the director and warehouse manager, and interviewee C. Furthermore, the author felt it not appropriate to reveal further details, such as where their company was specifically located, for that might let out the identification of individual respondents. So through every stage of the research, all details and information from the three interviewees were kept safely.

6.3 Limitation and Further research

Nowadays there are many discussions on the VMI system, as well as raised many advantages, but to sum up, there are mainly the following three points:

Firstly, VMI allows the demand side to reduce the inventory, even to achieve zero inventories.

Secondly, VMI takes the initiative of inventory control to the suppliers, so suppliers can also gain the benefits.

Finally, VMI with the 3PL evolved into the JMI (joint inventory management) as well as CPFR (collaborative, planning, forecasting and replenishment) can reduce the overall demand and supply chain management costs, eliminating bullwhip effect to achieve a “win-win” situation.

The first point is obvious, as the case study, Shuanghui Group had benefits from the implementation of VMI. There are some problems with the second point. The supplier dose gets some initiative to control the inventory, but what are the specific “benefits”? Is it, for example to reduce inventory or logistics costs? In this case, the Shuanghui Group's supplier helped them to manage the inventory, made every effort to ensure timely replenishment, and the Shuanghui Group's inventory costs were, indeed, reduced, and the risk of stock out was also reduced. However, what benefits did supplier have? In this case, the supplier ensured uninterrupted supply to the Shuanghui Group, but this resulted in increasing their own inventory, and to increasing the inventory costs. As a result, the Shuanghui Group's interests are guaranteed, but they are not responsible for the losses of the supplier. Therefore, in the final analysis, what benefits that did supplier can get? In view of the limitations of this paper, author only investigated the case to the demand side that is Shuanghui Group, and not fully understands the situation of supplier, so there are some limitations of knowledge of VMI. Therefore, in the future author will study the VMI in supplier's point of view, for a more comprehensive understanding of VMI. QUANTITIVE DATA

The third point also has some doubts based on this case. How can VMI eliminate the bullwhip effect? How to achieve it specifically? How to prove this point? Due to the limitations of this research, the author did not find a clear answer. Based on this case, the Shuanghiu Group according to their own inventory and future forecast to gave supplier a suggestion about the replenishment, supplier replenish based on this information, or supplier according to the usual sales records and inventory information to analyze and forecast, then ensure timely replenishment. However, everything had to be built on the basis of the Shuanghui Group's information, everyone had to listen to the Shuanghui Group, the supplier only “owned” the inventory, but didn't really “manage” inventory in practice, so this means this did not adequately reflect the benefits of a vendor-managed inventory. Because of the limitations of research methodology, the author just used telephone and e-mail to interviewed two staffs in the Shuanghui Group and one staff in the SH supplier, thus don't have the in-depth understanding of VMI. Therefore, in the future, the author needs more in-depth contact with the two companies, even, if necessary, contacting more companies, to have a better understanding of the VMI operation, and find the answers to these questions.

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