Vendor Managed Replenishment
vs. Global Procurement
Jim Prevor’s Perishable Pundit, September 14, 2006
There is a battle at the heart of perishable food procurement today and it is a war between two business models. Call it vendor-managed replenishment versus global procurement.
Basically, the Wal-Mart model has been built around vendors taking responsibility for one product category. But the issue goes far beyond Wal-Mart. While in South Africa, I learned that Capespan, the successor organization to the once-monopoly fruit exporter from South Africa, is handling almost a third of its volume in non-South African products.
Why? Because Capespan has taken on the responsibility of managing procurement programs for companies such as Tesco. If you are going to be a category manager for, say, apples, for Tesco you can’t just ship from South Africa; you need apples from the UK, France, other parts of Europe and North America. We dealt with Tesco’s efforts to enter the U.S. market here and here.
When vendors manage replenishment, they generally take on real responsibility. They have to meet metrics on how frequently things can be out of stock, what percentage of shipments get rejected and much more. Usually they must develop some sort of annual business building plan to increase sales by a certain set percentage.
And, customarily, the vendors agree to a fixed price.
Good vendors take these responsibilities very seriously. When the hurricanes hit last year and many items were in short supply, my phone rang off the hook with vendors looking for overseas connections so they could honor their commitments — often at substantial risk of loss.
Even if the retailers ultimately declare a natural disaster a force majeure and agree to pay more, that often happens months down the road long after these vendors spent their own money to keep supply flowing.
These vendors manage the supply chain through a delicate dance: they usually own farms, they may also represent growers, they buy product on the tree or in the field, and they buy on the free market. They deftly move from growing region to growing region to keep the retailer supplied with satisfactory product.
Now global procurement, as a direct function of major retailers, is searching for a niche in this world. In grocery, global procurement is king. Why? Because brands are paramount, and so a global procurement office can negotiate on behalf of all divisions of a global retailer with Proctor & Gamble.
Here is the problem: if the retailer’s global procurement office goes down to Chile and buys all the grapes for North America, how can the retailer hold the vendors in America responsible for replenishment? And how can the retailers hold the vendors responsible for meeting the metrics?
Is there a way to integrate both into the retailer’s procurement program?