HERSHEY TO EXPAND VMI PROGRAM

MINA WILLIAMS

SAN FRANCISCO -- Hershey Pasta Group plans to add 14 retailers this year to its three-year-old vendor-managed inventory program.

The move will raise the total of VMI customers to 20, according to Keith Costello, director of customer service for the group, a part of Hershey Foods Corp., Hershey, Pa.

"These 20 customers represent 15% of all case volume," said Costello, speaking here last month at a conference sponsored by the Institute for International Research, New York.

Expanding the program to more accounts also means putting more of Hershey's distribution centers on-line, he said. A total of 30 Hershey's nonrefrigerated distribution centers will be involved by year end, he added.

Hershey Pasta Group started its vendor-managed inventory operations in 1994, along with Procter & Gamble and Kellogg.

"We got into VMI by being dragged by a 700-pound gorilla," he said, referring to a major retail account.

From that one customer in 1994, which Hershey serviced through two distribution centers, the pasta group expanded to four customers in 1995 through six of its distribution centers, according to Costello.

Benefits of VMI programs first fall to the retailer, but manufacturers also have seen monetary improvements using this system, he said.

"Most manufacturers have experienced a 1.2% drop in warehouse handling costs," he said, adding that just now his division is "getting close to realizing manufacturing efficiencies."

Transportation cost reductions were achieved by shipping annual sales volume on fewer loads and increasing order size through VMI.

"The target was to increase average order size by a minimum of 5% to 10%, bringing less trucks and freight costs to the customer," he said. By increasing order sizes, customers have added buying efficiencies and reduced inventory.

"We took on a customer that did not order by the truckload, but was able to work within the perimeters," Costello said. "What we found was that VMI actually raised their order amount, putting them in a better price bracket."

Those increased order sizes have resulted in the elimination of 24 truck shipments, which significantly reduced transportation costs for Hershey Pasta Group, according to Costello.

Additionally, with fewer outbound orders to process and using VMI to help configure orders, full-pallet loads are going out more often than partial pallets, he said. "This has improved order lead time and has helped us reduce rush orders."

Partner selection, and the establishment of the implementation and forecast teams, are vitally important to a successful VMI operation, he said.

"In selecting partners, you need to determine who is next and in what sequence," he said. "You need to determine if there are production opportunities and most of all answer if here is an opportunity to sell more product to the customer."

VMI can be used as a sales tool with the customers, according to Costello. "Partners must be selected carefully with full evaluation," he said.

"The implementation team can evaluate what is the customer order pattern," he said. "It is important to have electronic data interchange people on that team.

"The forecast team must include field sales, customer service administrators and regional brand managers," he said.

Costello suggested that vendors have customers sign an agreement distinguishing the responsibility of a variety of functions such as forecasting, promotion and quantities.

Within the grocery industry, the end-of-the-aisle, ad or shelf talker -- along with other merchandising activities -- are used as a part of forecasting, he said.

"Monitoring promotional activity is the customer service responsibility, promotion forecasting done by retail partner," Costello suggested.

Vendor-managed inventory systems can be applied to a variety of retail systems to help manufacturers maximize savings in all areas of their business, he said.

"It used to be that people through VMI could only work on everyday-low-price retailers," Costello said. "We have proven that VMI can work on a high-low merchandising basis." Hershey Pasta Group, a division of Hershey Foods Corp., manufactures and distributes branded and private-label pasta throughout the country. The company uses a regional marketing strategy for its Ronzoni, San Giorgio, Light 'n Fluffy, American Beauty and Skinner brands.