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How It Aids In Vendor Relationship In The Retail Industry

Essay by   •  November 27, 2010  •  3,272 Words (14 Pages)  •  1,459 Views

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INTRODUCTION

The tough competition within the retail industry has forced most retail firms to cut costs but yet increase customer value and satisfaction . Retail firms that have a strong emphasis on supply chain management have a strategic competitive advantage over retail firms that just focus on revenues as their main source of profitability. As a purchaser would often say, a dollar saved in reducing the cost of a product will result in a dollar extra in profitability, whereas a dollar gained in revenue would only result in 50 cents increase in profitability if the profit margin is 50%. Supply chain concepts like Vendor Managed Inventory (VMI), Just-In-Time (JIT) and Collaborative Planning, Replenishment and Forecasting (CPFR) are the popular concepts being adopted for use in the retail industry to improve these vendor-retailer relationships in order to achieve a strategic advantage.

In this paper, I seek to explore the potential benefits the retail industry can reap through the use of technology in aiding with its vendor relationships. I will touch on the 3 most common and beneficial IT systems in my view that retailers are able to implement. I also consider the costs involved and evaluate the justification of technology.

GETTING THE MOST OUT OF INFORMATION TECHNOLOGY

Getting the most out of information technology (IT) is a 3-pronged approach (Appendix 1). Retailers first have to understand their own business needs. In view of our aim of improving vendor relationships, retailers have to recognise that in order to increase profitability, improving supplier relationships is eminent. Next, retailers have to align IT with their business. Retailers have gotten past the stage of sharing previously safe-guarded secrets on purchasing trends and consumer buying patterns. However is the need for a �seamless-end-to-end business process’ really important? Or can information be shared without the intervention of IT? Even though the costs of implementing IT systems may be high, vendors and major retailers alike are adopting it, and those who do not follow would be left behind. Vendors are getting more into information technology, recognising what technology can do for their businesses in terms of profitability and efficiency. It is only a matter of time where retailers have no choice but to align their IT investments to catch up with their vendors. Lastly, retailers have to consider the type of IT projects they have to embark on. Even though almost all IT systems offer some form of improvement, not all would be productive for all retailers. Some systems may be too costly for small time retailers with low volumes, while some may be inadequate for a multi-billion global conglomerate. Retailers have to work out the benefits and costs of these systems and evaluate the added value IT can bring to their business.

ELECTRONIC DATA INTERCHANGE

Electronic Data Interchange enhances interaction between vendors and retailers, establishing a platform for vendors and retailers to interact so that supply chain management concepts like Just-in-time (JIT), Vendor Managed Inventory (VMI), and Collaborative Planning, Replenishment and Forecasting (CPRF) can be employed. EDI structures a set of standards for information to be exchanged electronically from one computer to another or from one firm to another automatically without any human intervention.

CONSIDERATIONS FOR EDI

Traditional EDI can be transmitted in 2 ways: Closed networks using Direct Link Networks and Private/Proprietary Networks and open networks using Value Added Networks (VAN). Closed networks have retailers linking directly to their vendors and are suitable for very large retailers with a huge amount of data transmitted. VAN plays an intermediary role in linking retailers and vendors through a secure network and charges by the number of transactions. VAN is the most common form of traditional EDI employed and suited more for retailers with fewer transactions. EDI requires for a committed dedication from all departments in the firm. Because EDI requires a change in the format of information from paper to electronic, the implementation of EDI would require both time and money which often leads to frustrations and discrepancies among departments. Furthermore, EDI would also require a training program in place for employees to be well-versed in the system. The key consideration for retailers is the size of its supply chain as the benefits of EDI are best exploited when the retailer has a large number of vendors.

BENEFITS OF EDI

The elimination of paperwork and reduction of red-tape leading to the ease of communicating with vendors could result in direct benefits like cost savings and operational efficiencies. Retailers are also able to align their strategy with vendors and benefit in the long run when information passed on through EDI to vendors would result in a shorter lead time, more accurate scheduling and forecasting, and an elimination of inventory due to the possibility of JIT concepts. VMI concepts used by Giordano International, and CPRF used by Wal-Mart, have also been employed successfully through the implementation of EDI. By integrating and sharing information across the supply chain, long lasting relationships with large key vendors could be formed with vendors giving retail firms the competitive advantage over competitors without EDI implementation. These strategic partnerships as a result of EDI could then lead to retail firms having earlier access to new products and priority in obtaining popular products.

COSTS OF EMPLOYING EDI

Employing EDI does not come cheap, with setup costs in the first year ranging from between US$200,000 to US$1 million. Subsequent annual operating costs average US$200,000 . The high costs drive most retailers away from this amazing technology as most feel that the types of documents or processes employed do not justify the cost. Moreover, employing EDI does not guarantee immediate success, with most companies connecting to top EDI-ready suppliers only after a period of 2-5 years. As a result, EDI has long been envisioned as only being used by large retailers as only they have the capital, influence over its vendors, transacted volume and sales revenue substantial to justify such a system. In addition, with most retailers being small and medium enterprises (SMEs), it leads to a chicken-and-egg problem that has led to vendors not wanting to participate in employing EDI as most SMEs do not have EDI. As a result, the lack of participation restricts the capability of EDI, keeping costs of employing EDI high.

EDI IMPLEMENTATION

The benefits that can be reaped from

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