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Vendor Managed Inventory

Discuss about the Supply Chain Integration Strategies Industries.

There are lots of issues at MDC presently. On the other hand, due to increased competition, its customers have started demanding complete solutions and not just material and also want to hold fewer inventories at their end. As a result, things are quite challenging for the MDC. Also, Inventory turnover is very low at MDC which means there is already too much inventory which is not getting converted to sales. Apart from this, MDC has to manufacture too many SKUs as the exact requirement of the usage of the particular SKU is predicated at the last stage and sometimes even during operations doctor decide which variant of the product is to be used. In such situations, variants which were not used become obsolete. Product obsolescence has also increased at MDC in last few months.

Considering the present situation at MDC, the best strategy would be to use the VMI (Vendor Manager Inventory) as well as postponement. Together these 2 strategies will transform the MDC business operations, eliminates the current problems and also provide very good experience for its customers. Let us look into detail how each of the strategy will help:

Vendor Managed Inventory: Hospitals are demanding the lower levels of stock holdings from the MDC. Thus, MDC can think of using VMI where hospitals will share their forecasts and demand information with the MDC and MDC will maintain as well as own the inventory at the hospital’s location. Once the inventory is converted into Sales, it will be transferred to books of hospitals (Donavan, & Manuj, 2015). This will help the hospital to lock less investment in holding the inventory which is one of their prime concerns. Also, this strategy will help the MDC to improve the inventory turnover as the bullwhip effect will be lowered over the supply chain and it can forecasts demand better when they have full visibility of the data at the hospital. Thus, it is a win-win situation for both the parties.

Postponement at Warehouse: Another strategy is the postponement which is also known as delayed differentiation. Thus approach is usually followed by the organization that provides mass customized products like Dell, Paint industry and so on. In this approach, organizations manufactures subassemblies/common components which are common across the product and then manufactures final product only after the customer order is received. Thus, it can first push material to a point in the supply chain from where it is pulled based on the customer requirements (Ivanov, Tsipoulanidis, & Schonberger, 2017). MDC also provides quite a large number of variants so it can adopt this strategy at its warehouses. This will help the MDC to fulfill the demands of the hospitals in a less lead time and that too without building too much inventory. This will improve the inventory turnover rate at MDC and also decrease the product obsolescence.

Postponement at Warehouse

Cross docking: Currently, Products are shipped to 15 warehouses from manufacturing plants. From these 15 warehouses, products are again shipped to other 40 warehouses which are located near the urban areas across Europe. Thus, there will be excessive material handling where first material is unloaded for storing in warehouse and then again it is handled for putting in outbound vehicles. Cross docking is a strategy where material is not stored at warehouse; it will be simply transferred from incoming vehicles to outbound vehicles (Nikolopoulou, Repoussis, Tarantilis, & Zachariadis, 2017). If this strategy is not followed for all the products, it can be employed by MDC at least  for those products which relatively have a higher and predictable demand. This will help the organization to save the cost, time as well as space on warehouse. Organizations like Coca –cola uses this strategy and has benefitted by it.

Postponement at Hospitals locations: This approach will be the best for the MDC. Although it can be little expensive as it had to install some machines and appoints some people at hospitals location who can build the exact product at the last moment. But this will drastically cut down the product obsolescence rate, the levels of inventory owned by the Hospital as well as by the MDC. Also, this approach will work if Hospital is agreed form VMI and allocating a space to MDC at its locations. MDC can also start pilot project of combing VMI and postponement and then can roll out this strategy for other customers once it realized the huge benefits of this approach (Sabet, Yazdanu, & De Leeuw, 2016).

Logistics strategy is one of most important in any organization because it also helps in the formulation of high level strategy. While some years back, logistics was used to be considered as a part of supply chain but now it has been treated as an independent function which drives the while supply chain. Agility, cost, responsiveness, quality, high inventory turnover which are some of the parameters to measure supply chain excellence can be influenced heavily by the logistics strategy of the organization. In its most basic sense, logistics is how the organization is fulfilling the needs of its customers and also buying the raw materials from the suppliers. There are often multiple tradeoffs. For instance, lower lead time will increase the agility and responsiveness of supply chain and helps you to lower your inventory levels but costs will be higher so as to use fastest means of transportation like Air. Waterways are the cheapest means of transportation but they are quite slow and often increase the lead time. Different organizations compete with each other not just based on their business model but also based on its logistics strategy.

Cross Docking

During 1990s, Compaq was the world’s leader in selling PCs. Compaq provides more reliable and high graphics PCs at reasonable prices. However it did not offer the customization. When Dell came, it was able to provide the customized products to every customer using its innovative logistics strategy which is of delaying differentiation to farthest point in supply chain as possible which is also known as postponement (Brumme, Simonovich, Skinner, & Van Wassenhove, 2015). There were other vendors like Microsoft, IBM and HP but they have many other business lines and also cash rich.

In this case study, Like Dell, MDC also has unpredictable demand for its products and also the lead time is on the higher side, so the postponement strategy will work for MDC also. MDC also has to keep the many variants ready but only Doctor decides on the spot which variant to choose and hospitals also wants to bear the cost of that variant also and not the other variants. Thus, Postponement will be the best solution for MDC to satisfy customer as well as to improve its own financial statistics.

MDC can maintain its competitive advantage by delivering not just the medical devices but by delivering entire solutions to its customers. In this complex and dynamic world where companies have to constantly innovate their business model to keep the pace with the competitors, it becomes imperative for them to provide complete solutions to their customers. Thus, MDC can maintain its competitive advantage by tailoring the solution for its customers and solving their business problems (Thompson, Peteraf, gamble, Strickland, & Jain, 2013). For instance, Hospitals want to hold less inventory so as to lock less investment, MDC can provide VMI solution to address such solutions whereby inventory will be owned by the MDC but will be maintained at the premise of the hospital. It will be transferred to hospitals only when it is converted to sales. Hospitals inventory turnover ratio in such cases will become very high and keep them quite competitive. And if the Hospital business is thriving i.e. Hospital in this case due to MDC business strategy, then it is definitely a competitive advantage for the MDC (Thompson, Peteraf, gamble, Strickland, & Jain, 2013).

Another issue hospitals are facing is frequent stock-outs. Stock-outs occur when hospitals are not able to match supply and demand and prefer to order fewer inventories to avoid loss of obsolescence. At such times, VMI will help to eliminate the Bullwhip effect by enabling MDC to forecast and maintain the inventory at the hospitals. This will also help in tackling the issue of stock-outs for hospitals without costing them a single cent. Another solution it could offer is postponement to manufacture only those variants just in time which are actually required.

Postponement at Hospitals Locations

Whether these strategies are suitable for other companies or not depends upon the business model of the company. For instance, the companies which have predictable demand don’t need to apply postponement because demand is already known. On the other hand, an organization that does not have predictable demand and manufactures mass customized products has to use postponement. Also, postponement is also of many types. Producing mass customized products is 1 type. Another type of postponement strategy is labeling strategy which means delaying the labeling on a product to la last moment so that it can be used to fulfill the requirement for any region by using appropriate language for labeling. Walmart uses VMI approach because it had to stock the various brands with huge inventories and suppliers compete with each other to get a good shelf in Walmart. Similarly, if you are relatively new store, suppliers will not be ready to managed inventory at your end.

Thus, there are numerous logistics strategies like Postponement, cross docking, VMI and there is no one size that fits all. There is always one of its kind solutions that organizations have to tailor for themselves based on their business solutions. 1 strategy could be suitable for 1 company but can be detrimental to other.

According to a research, not more than 50% of the companies survive or at least maintain their leadership status beyond a period of 16 years (Hansen, & Dunker, 2013). And that is the reason concept of sustainability is important. In this Globalized world of digital revolution where disruptive technology like internet of things and many others are evolving, it is very much important for nay organization to constantly innovate its business model in order to survive. Kodak and Xerox failed to innovate themselves and thus lost their leadership status with the time (Cuthbertson, Furseth, & Ezell, 2015). Similarly, no matter how innovative range of medical devices MDC manufactures, if it has to survive it has to constantly upgrade itself. Although its range of products is very good but it can no longer be a differentiator in a today’s world where competitors are ready to provide complete solutions. Customer these days (Hospitals particularly in this case) is not only expecting the products to be good but they want end to end solutions that help them to lower their cost of business. The true mantra for the success for any company is to lower the cost of operations for its customers. In this case, if MDC is able to help hospital to meet its challenges by inculcating strategies like VMI and Postponement, only then hospitals will buy the services of MDC and MDC will remain sustainable. It is possible that after few years even VMI and postponement is not sufficient. Then MDC has to innovate methods to woo its customers.

After analyzing the case at MDC, several strategies are recommended that can help the MDC and its customers. VMI is recommended to MDC so as to meet the requirement of hospitals to hold fewer inventories. On the other hand, VMI will also help the MDC to better forecast demands at the hospitals and increasing sales by decreasing the stock outs. Postponement is also recommended because hospitals want to pay for the variant which they actually use and not for all the variants. This has also resulted in the obsolescence. Thus, Postponement will help the MDC to provide hospitals exactly what they need quickly and creates win-win situation for both and it will also increase the inventory turnover for the MDC.

Conclusion

This case study discusses about the various challenges that MDC is facing. Not only this, its customers are also facing challenges and starts demanding more from the MDC. MDC has to innovate its strategy to meet the current challenges and provides complete solutions to the hospitals. No matter how good the products of MDC are but until they provide the complete solutions to their customers, they will not be competitive in the market.

Brumme, H., Simonovich, D., Skinner, W., & Van Wassenhove, L. N. (2015). The Strategy?Focused Factory in Turbulent Times. Production and Operations Management, 24(10), 1513-1523.

Cuthbertson, R., Furseth, P. I., & Ezell, S. J. (2015). Kodak and Xerox: How High Risk Aversion Kills Companies. In Innovating in a Service-Driven Economy (pp. 166-179). Palgrave Macmillan UK.

Donovan, P. S., & Manuj, I. (2015). A Comprehensive Theoretical Model of the Complex Strategic Demand Management Process. Transportation Journal, 54(2), 213-239.

Hansen, E. G., & Grosse-Dunker, F. (2013). Sustainability-oriented innovation. In Encyclopedia of corporate social responsibility (pp. 2407-2417). Springer Berlin Heidelberg.

Ivanov, D., Tsipoulanidis, A., & Schönberger, J. (2017). Production Strategy. In Global Supply Chain and Operations Management (pp. 121-140). Springer International Publishing.

Nikolopoulou, A. I., Repoussis, P. P., Tarantilis, C. D., & Zachariadis, E. E. (2017). Moving products between location pairs: Cross-docking versus direct-shipping. European Journal of Operational Research, 256(3), 803-819.

Sabet, E., Yazdani, B., & De Leeuw, S. (2016). Supply chain integration strategies in fast evolving industries. International Journal of Logistics Management.

Thompson, A., Peteraf, M., Gamble, J., Strickland III, A. J., & Jain, A. K. (2013). Crafting & Executing Strategy 19/e: The Quest for Competitive Advantage: Concepts and Cases. McGraw-Hill Education.

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