Vendor managed inventory

From Supply Chain Management Encyclopedia

Russian: [http://ru.scm.gsom.spbu.ru/Управляемые_поставщиком_запасы Управляемые поставщиком запасы

Vendor managed inventory (VMI) is an approach of inventory management and order fulfillment whereby the supplier, not the customer, is responsible for managing and replenishing inventory. Basis on which decision will be made is agreed with the retailer beforehand, and is ‘’’based on retailer’s sales information’’’. Supplier assumes responsibility to monitoring ‘’’sales and inventory’’’. VMI helps to efficiency increase a supply chain performance. The main difference from “general approach” is that usually the information about customer’s (retailer’s) sales and inventory level is not shared with upstream companies and this makes inventory management complicated for both a customer and a supplier. The first practice of VMI was introduced by Wall-Mart and Procter-and-Gamble when these companies tried to minimize inventory costs and simplify inventory management on Pampers diapers^[1]. VMI planning system is not associated with inventory ownership but as information sharing requirements are similar to those in consignment arrangements ownership transfers to the stocking location. Under VMI, the distributor monitors customers’ sales and inventory in order to place replenishment orders for him^[2]. In VMI system supplier can observe every item (associated with this supplier) on customer’s warehouse. In summary, VMI decreases stock-outs and inventory in a supply chain thanks to following factors^[3]:

• shortening the supply chain,
• centralization of forecasting,
• acceleration of communication process on stock-outs and inventory level (because of EDI),
• absence or less frequent promotions (by manufacturer or distributor),
• increase in loyalty to a supplier and improving of relationships in a supply chain.

By pushing the decision making responsibility further up the supply chain, the manufacturer / vendor is in a better position to support the objectives of the entire integrated supply chain resulting in sustainable competitive advantage:

• Manufacturer is responsible for maintaining the distributors inventory levels
• Collaborative supply chain initiative
• Optimizing supply chain performance
• Manufacturer has access to the distributors inventory data and is responsible for generating purchase orders

Advantages and Problems of VMI

The benefits of VMI system approach are following ^[4]:

• Improved client service. Getting timely information from POS data, suppliers are able to respond better to customer’s needs providing required quantities in a right location at a certain time.

• Decreased demand uncertainty. Through permanent monitoring of market demand flows and customer’s inventories, a distributor is supposed to reduce the number of large unplanned customer orders and, finally, move them off at all.

• Decreased inventory requirements. VMI planning system helps a distributor to decrease the inventory requirements as he knows exactly how much inventory the customer disposes, therefore, there is no need to have reserve inventories in order to manage uncertain orders.

• Decreased costs. Despite the fact that VMI planning system requires additional expenses on its launching and implementation, all elements of a supply chain – manufacturers, distributors and customers – will reduce costs by re-engineering and merging their order fulfillments and distribution center replenishment activities.

• Improved customer retention. Installing of VMI system is a specific-related investment into long term relationship between supplier and customer. As the launching of the system costs a lot, switching costs for a customer is a relatively high so he will prefer to deal for a long time with the same supplier.

• Decreased reliance on forecasting. By using VMI, a supplier gets instant data about customer’s inventories so a supplier do not have to make forecasts the customer’s demand for a product which typically contain loads of errors.

In spite of growing popularity and potential advantages of VMI planning system it is not the only solution. In fact, this solution is not available to every company because many suppliers will consider it only for their major customers. In addition, many vendors who are powerful in the industry would not consider VMI system at all as it is more advantageous for the customer than for the vendor and for some vendors whose profit-margin is already not high this increased customers power may result into pushing them out of business^[5].

It is also important that VMI is not a doubtless guarantee of increased efficiency which goes back to the outsourcing problem. Ideally, VMI should be as easy as a delegating of logistics operations to a specialized company (3PL). However, a company should not choose a 3PL without conducting the proper diligence. Similarly, a company should not hand off a part of its supply chain to a vendor (even a trusted vendor) without assessment if this vendor is certainly better choice for handling logistics. Unless company’s suppliers have access to the same types of discounts, experience and engineering tools, companies that go into VMI relationships can significantly lose some logistics ground and pay the price in conditions of lower efficiency, decreased reliability and higher transit costs. As a result, VMI often faces resistance. There are some organizational concerns about roles and skills, trust and power shift such as^[6]:

• influence of compensation – bonuses depend on employees’ sale activities, but sales force has less influence under VMI,
• loss of control under inventory level,
• downsizing,
• possible technical problems with VMI system,
• a concern that decreases inventory may lead to less shelf space and loss of market share.

Thus, VMI can be a significant shift in supply chain organization, but there are still obstacles for its extensive implementation by companies. However, the potential benefits for both parties – a supplier and a customer – make VMI approach attractive, lucrative and attainable.

References

1. ↑ Saxena R. (2009) Vendor-Managed Inventory, Industrial Engineer, Vol. 41, Iss. 7, 20-20
2. ↑ Badrakhan B. (2010) Data-Driven Vendor-Managed Inventory, Electrical Wholesaling, Vol. 91, Iss. 6, 32-34
3. ↑ Evanko P. (2010) Vendor Managed Inventory, HVACR Distribution Business, Vol. 75, Iss. 12, 32-35
4. ↑ Evanko P. (2010) Vendor Managed Inventory, HVACR Distribution Business, Vol. 75, Iss. 12, 32-35
5. ↑ Saxena R. (2009) Vendor-Managed Inventory, Industrial Engineer, Vol. 41, Iss. 7, 20-20
6. ↑ Lapide L. (2008) Use VMI to Improve Forecasting, Journal of Business Forecasting, Vol. 27, Iss. 3, 28-30