Technology: Finding Profits Through Vendor-Managed Inventory

At the same time that Panasonic is seeking a single version of the truth to facilitate product launches, the company is also improving the information flow back to Panasonic’s subsidiaries once products are out the door. The goal: to better understand how merchandise moves through sales channels, and to allow management to fine-tune its forecasts and production planning accordingly.

Panasonic, along with every other consumer electronics manufacturer, is grappling with dealers and retailers who are frustrated by ongoing price erosion. “They’re up in arms about how little money they’re making on these products, and about how Internet-based stores are significantly undercutting their prices,” says Paul Jackson, an analyst at Forrester Research Inc.

To address these issues, Panasonic, in cooperation with retailers such as Best Buy Co. Inc., decided to experiment with a vendor-managed inventory model. In a VMI arrangement, Panasonic assumes full ownership of all inventory in the supply chain, removing the interim step of selling its products to retailers who then sell them to consumers. In return for removing the cost of owning the inventory, Best Buy splits the higher margins with Panasonic, which—perhaps more important—gets an end-to-end view of the supply chain in real time.

“We’ve been able to take anywhere from 30 to 40 days of inventory out of the model on high-ticket items,” says Bob Schwartz, vice president of Panasonic North America Information Technology, “because we can now optimize forecasts on sell-out rather than sell-in.” In other words, instead of using sophisticated guesswork, Panasonic can now resupply the channel based on actual sales information flowing directly to the company, which means that Panasonic isn’t required to keep nearly the same amount of inventory in stores. Of course, with some of the company’s best-selling items—plasma TVs, in particular—the current problem is not knowing what is and isn’t selling, but simply whether or not they can make the TVs fast enough. “At some point, somebody has to say ‘I think X number of products will sell, so we should build X number of products,'” says Steve Kovsky, the senior digital-TV industry analyst at Washington, D.C.-based research firm Current Analysis Inc. “And the fewer people you have making that guess, the better off you are. But there’s a bigger problem than that for now—they just can’t make enough TVs.” Kovsky points to the fourth quarter of 2005, when Matsushita’s market share in plasma TVs fell to 26 percent, down from 29.1 percent in the third quarter, because its factories were at full capacity, and the company lost share to competitors LG Electronics Inc., Samsung Corp. and Royal Philips Electronics N.V.