TERM PAPER

OF
OPREATION MANAGEMENT
ON
VENDOR MANAGEMENT INVENTORY

SUBMITTED TO
MISS. NEHA TIKOO
FACULTY OF LIM

SUBMITTED BY
ADISH JAIN
ROLL NO. - B40
REDG. NO. – 10905517
SECTION – RT1903

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 TABLE OF CONTENTS

1. INVENTORYMANAGEMENT……………………………....03

2. VENFOR INVENTORY MANAGEMENT…………………..03

3. OBJECTIVE OF VMI…………………………………………03

4. REVIEW OF LITERTURE……………………………………05

• DEEP PARTNERSHIP…………………………………..05

• THE BOTTOM LINE……………………………………09

5. MODEL OF VMI………………………………………………11

6. ELECTRONIC DATA INTERCHANGE……………………...12

7. PROCESS OF VMI…………………………………………….12

8. BENEFITS OF VMI……………………………………………15

9. CURRENTLY USE OF VMI…………………………………..17

10. CHALLENGES AND LIMITATIONS OF VMI………...17

11. OVERCOMING THE LIMITATIONS…………………..18

12. CONCLUSION…………………………………………...19

13. BIBLIOGRAPHY………………………………………...20

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 INVENTORY MANAGEMENT
Inventory management is primarily about specifying the size and placement of
stocked goods. Inventory management is required at different locations within a
facility or within multiple locations of a supply network to protect the regular and
planned course of production against the random disturbance of running out of
materials or goods. The scope of inventory management also concerns the fine
lines between replenishment lead time, carrying costs of inventory, asset
management, inventory forecasting, inventory valuation, inventory visibility,
future inventory price forecasting, physical inventory, available physical space for
inventory, quality management, replenishment, returns and defective goods and
demand forecasting.

VENDOR MANAGEMENT INVENTORY

The purpose of Vendor Management Inventory (VMI) partnership programs is to
electronically share information between members of the supply chain resulting in
shorter lead times, reduced inventory, reduced obsolescence, and more efficient
manufacturing. The up-stream member of the supply chain (the supplier) takes on
more decision making for what to supply to the customer. The result is a more
leveraged relationship for the supplier and improved service for the customer. A
means of optimizing Supply Chain performance in which the manufacturer is
responsible for maintaining the distributor’s inventory levels. The manufacturer
has access to the distributor’s inventory data and is responsible for generating
purchase orders.

OBJECTIVE OF VMI
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Success in supply chain management usually derives from understanding and
managing the relationship between inventory cost and the customer service level.
The most attractive projects yield improvements along both dimensions, and this is
certainly the case with VMI. To begin, we examine how each partner in a VMI
relationship reduces cost and improves service.

REDUCED COST
Demand volatility is the key problem facing most supply chains, eroding both
customer service and product revenues. In traditional retail situations, sales
fluctuations are made worse by management policies. Ordering patterns may be
aggravated by demand uncertainties in general, conflicting performance measures,
planning calendars used by buyers, buyers acting in isolation, and product
shortages that cause order fluctuation.

Many suppliers are attracted to VMI because it mitigates uncertainty of demand.

Infrequent large orders from consuming organizations force manufactures to
maintain surplus capacity or excess finished goods inventory, which are very
expensive solutions, to ensure responsive customer service. VMI helps dampen the
peaks and valleys of production, allowing smaller buffers of capacity and
inventory.

IMPROVED SERVICE
From the retailer’s perspective, service is usually assessed by measuring product
availability. This is rooted in the simple notion that if a product is not there when
the customer walks into the store, then a sale is lost. The consequences are
particularly severe when a promotion is running; simply the cost of the lost sale
may be compounded by the loss of goodwill. In their merchandising plans, retailers
favor their best suppliers with more and more attractive shelf space. Thus, a
supplier known for reliability benefits from higher revenues. All else being equal
everyone gains from improved service.

Service can be improved further by widening the scope of available solutions to a

given problem. For example, in times of crucial shortage, inventory balancing

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across one customer’s distribution centers (or even between customers) may be
necessary. In some cases, rebalancing among customers may even be the most
economical approach. This is not usually an option without VMI, for neither
suppliers nor customers can see the widespread disposition of inventory. With
VMI, stock balancing can be achieved when customers return product to the
supplier, who can send it to another customer. At worst, this approach can result in
excessive transportation cost.

REVIEW OF LITERATURE
ARTICLE RELATED TO VMI
• DEEP PARTNERSHIP:
By Doug Chandler, Executive Editor

Oct 1, 2008 12:00 PM

Graybar is finding significant benefits from trusting some of its key

manufacturers to manage its inventory levels with VMI.

Many distributors are wary of giving their suppliers the power to determine
their inventory levels, and justifiably so. The (usually) friendly antagonism
of manufacturer sales managers trying to load up distributors' shelves to
boost their own sales numbers has been part of the game since distribution
began.

It doesn't have to be that way, though. Vendor-managed inventory (VMI) is

no longer a radical concept in electrical distribution — the concept has been
around since Wal-Mart and Procter & Gamble started working on it in the
1980s, and first appeared in the electrical industry in the early ‘90s — but
it's still rare enough that getting a look at a VMI relationship that works for
all involved brings some valuable insights.

Graybar, St. Louis, understood years ago that working with its suppliers on
inventory could improve efficiencies throughout the supply chain. Since

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1992, the company has been using several planning tools to engage in VMI
with suppliers. About four years ago, it added VMI services provider
Datalliance, Cincinnati.

Datalliance has been providing VMI services since its founding in 1991, and
has been working in the electrical industry for the past 10 or so years, says
Bob Jennings, vice president of sales and marketing. Datalliance is working
with about 18 electrical manufacturers and about 75 electrical distributors,
and has similar market share in automotive and truck parts, Jennings says.

The VMI services Datalliance provides are handled through a “software as a

service” (SaaS) format, where all the software is managed on Datalliance
web servers and suppliers and distributors send and receive data and reports
over the Internet. Fees for the service are paid by the manufacturers. “The
payback for the suppliers is to increase sales. Suppliers have reported to us
that that is a more lasting payback for them than asking the distributor to
share in paying for the cost of the program,” Jennings says.

Graybar had established VMI relationships with several large suppliers when
it approached Berk-Tek in 2005. Berk-Tek, New Holland, Pa., part of the
Paris-based global cable manufacturer Nexans Co., was very interested.
Berk-Tek manufactures fiber-optic and copper structured cabling products
for LAN, SAN and data center installations. The company produces over
20,000 SKUs in three manufacturing plants in Pennsylvania and North
Carolina, and Graybar is one of its largest distributors.

One of the realities of Berk-Tek's business is that demand is often project-

driven, such as for construction of a new office building, which creates
demand spikes that can be difficult to manage. When the company ran the
business case for VMI, the results were promising.

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“The ROI was certainly compelling, but our decision to proceed was also
based on strategic advantages we could get from VMI,” says Paul Trunk,
senior vice president of sales and marketing for Berk-Tek. “Among these
were additional benefits in improved trading partner relations with Graybar
and, potentially, Berk-Tek's other large distributors.”

“We were looking for a way to improve our process to eliminate human
error, reduce time and effort for both our distributors and Berk-Tek, and gain
better visibility of demand,” says Trunk. “When the distributor initiates its
own replenishment orders, the process is labor-intensive, prone to error, and
generally not ideal for a large distributor,” Trunk says. “Data-entry errors
can be costly for both us and our distributors. It makes a difference if an
order for 600,000 feet of cable is mistakenly placed as 6,000,000 feet.”

Once the agreement is in place, implementation begins with setting up the

distributor ERP system to deliver all inventory data on the supplier's
products into the Datalliance system, including historical data on which
initial forecasts can be built. Most current distributor ERP systems used in
the electrical industry have all the necessary capabilities to provide this data,
says Hoar.

“The distributor needs to be able to send daily sales and inventory

information,” says Hoar. “This tends not to be a challenge for the average to
large electrical distributor. All the major business systems have that
capability. Second, the distributor has to be able to receive an electronic
copy of a purchase order — EDI 855 — and the business systems in
electrical industry have that capability, too. Since we're sitting in the middle,
we don't care when or how the information comes to us, we just need to
know the distributor will be able to reliably create this information, then
we'll figure out the rest.”

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To implement the program with Berk-Tek, Graybar started in one of its
Chicago District branches. “We validated that everything was working
properly before we rolled it out to the entire district and then company-wide,
including our zone warehouses,” says Mike Dumas, Graybar vice president,
Comm/Data products. “Since then, we've reverse-engineered our process,
and now we start with our zones and move out to the branches. That allows
us to initially get the SKU investment-level data for that zone — what's
there, how fast is it moving — all the metrics for forecasting.”

It generally takes four to six months to get a location, such as a zone

warehouse, up and running with VMI for a supplier and then generally an
additional three-to-six months for full implementation, says Graybar
National Inventory Manager Rick Turner. Once the system is up and
running, the changes in the relationship between supplier and distributor
show up immediately.

The results have been positive for all involved. Berk-Tek saw an immediate
increase in sales through Graybar, which it attributes to fewer stock-outs and
better visibility of its product line, as well as making it easier to conduct
business with confidence.

“At the same time that we were increasing sales, we also enhanced our
market share within Graybar by increasing the number of active SKUs over
18 percent,” Trunk says. “Inventory turns improved nearly 30 percent and
stock-outs were reduced to an all-time low of 3.1 percent, which tells us that
VMI is helping us run our business more effectively.”

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 The benefits for Graybar start with a closer relationship with an important
supplier, says Dumas. “They (Berk-Tek) now have a stake in the game for
the accuracy of our inventory. We get better turns, lower total inventory
investment and less obsolescence and slow-moving product. This translates
into better utilization of our cash and resources — in other words,
profitability.”

Graybar now has more than a dozen supplier relationships either already
doing VMI or in the implementation process. “Certainly we want to do it
with our largest, most significant suppliers,” says Dumas. “We have seen
significant service, performance and financial benefits in every case with the
large suppliers. If we have significant inventory or high transactions with a
supplier, we'll sit down with that manufacturer and go through the Q&A
session to make sure it's a good match. It has to be a joint, mutual
opportunity before we will press forward.”

Distributors in the electrical market have some built-in advantages when

considering VMI, says Hoar. “The electrical marketplace tends to be
progressive, tends to look for ways to take costs out of the system, tends to
have large players and mid-sized players willing to try new things. That's not
the case in every industry. There's a level of trust in this industry that makes
it easier. That's not often found, and that's a key ingredient to making this
work well.”

• THE BOTTOM LINE

By Jonathan Byrnes

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 Pub. Date: November 5, 2008

Difficult economic times bring rare and valuable opportunities to drive

lasting change in your company.

Recession. Is this the worst of times or the best of times?

The answer is both. Difficult times bring difficult problems to all managers, but
they also create rare opportunities for renewing change.

Consider cost-cutting. In recession, revenues fall, cash is depleted, and stock prices
plummet. In most companies, the instinctive reaction is “all hands on deck” cutting
costs. The problem with cost-cutting, however, is two-fold: managers often do it
wrong, and cost-cutting is not enough.

Managers charged with cost-cutting in recessionary times all too often focus
inordinately on short-term incremental gains, and Miss Major strategic
opportunities.

In the first of my Harvard Business School Working Knowledge columns, I

described a pattern of profitability within companies that I had observed in
research and consulting across a dozen or more industries. The column is Who’s
Managing Profitability? And here’s the opening paragraph I wrote in 2002:

“The most important issue facing most managers in this difficult economy is
making more money from the existing business without costly new initiatives. In
my research and work with companies ranging from distribution to telecom, I have
been fascinated to find that at least 30 percent of each company's business by any
measure (accounts, products, transactions) is unprofitable, but that this is offset by
a few islands of high profitability. This sounds amazing, but it's true.”

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When I published this column, many managers wrote to agree that this described
their companies. This article has been reprinted widely and read by thousands of
managers, and to this day, no manager has disagreed.

What are the implications for cost-cutting? It means that there is a bad way and a
good way to cut costs. The bad way is to cut across the board (“let’s get inventory
and travel expenses down…”).

The good way is to look very carefully at your company and identify the winners
and losers in terms of profitability and growth potential. The key is to shift
resources systematically from the losers to the winners. This will enable you to
lock in and nurture the profitable portion of your business, and to find and land
more high-potential business. In the vernacular, you should “shoot one, promote
one.”
Opportunity for change:
It turns out that economic difficulties present a critical opportunity to drive
progressive change in a company. When my readers confirmed that the
profitability pattern I wrote about was so widespread, I called a number of top
executives to ask a simple question, “Why aren’t you doing anything about it?”

The answer varied a bit from individual to individual, but the essence was the
same: it’s too hard to move a company to change when it’s doing well. This was a
dilemma. It was very hard for executives to execute fundamental change, even
when they knew that it would create major lasting improvements.

Recession changes all of this. It is ironic that difficult economic times present one
of the most important opportunities to drive renewing change in a company. In
difficult times, with the company in jeopardy, managers throughout the company
are very worried. It is precisely at this time that they will be most receptive to
initiatives and change. Importantly, the same is true for customers and suppliers.

The essential question for a manager is how best to take advantage of this rare
opportunity. In my experience working with companies in hard economic times,
there are four major areas of opportunity.

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 MODEL OF VMI
VMI is a business model in which the buyer of a product provides certain
information to a supplier of that product and the supplier takes a much greater or
complete responsibility for maintaining an agreed inventory of the material.

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 ELECTRONIC DATA INTERCHANGE

Electronic data interchange (EDI) is the structured transmission of data between

organizations by electronic means. It is used to transfer electronic documents from
one computer system to another, i.e. from one trading partner to another trading
partner. It is more than mere e-mail; for instance, organizations might replace bills
of lading and even cheques with appropriate EDI messages.

EDI DOCUMENTS USED IN VMI

EDI is an integral part of VMI process. Some of the EDI transactions used in VMI
are listed below:
850 Purchase Orders: This document tells the manufacturer the distributor’s
(Retailer’s) inventory and level of activity per product. The standard 852 only
transmits a "change" since the previous transmission. An all item refresh sends
every field for every item this is often not done with the 852, but instead performed
with semi-annual and annual inventory counts at the store or warehouse level.
The section directly below lists out the common attributes or information carried in
various 852 documents. Most retailers will not include all of them.
852 Product Activities: This is a conversion of what should be a on a store shelf
compared to the activity included in the 852 document (Forecast amt +safety stock
– EDI 852 activity = PO qty). This communicates the items to be ordered.

855 Purchase Order Acknowledgements

856 Advance Ship Notice
810 Invoices

PROCESS OF VMI

Vendor managed inventory process impacts the many different replenishment

practices on the retailer side. The retailer and the supplier must establish clear
guidelines on inventory levels and fill rates. The VMI process involves exchange
of critical and sensitive information between retailer and supplier. If this data is not
shared or not accurate as per the established guidelines, it will have severe impact

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on the overall success of the VMI process. High-level descriptions of the various
activities involved in establishing the VMI process are described below.

1. MANAGEMENT COMMITMENT AND BUY-IN FROM

INVENTORY STAFF

If a retailer is establishing the VMI process, it should be treated as a strategic

initiative and the objectives of this process should be communicated to the
organization especially for the inventory and replenishment planners. The strategic
management team should understand the concept of VMI and be ready to accept
the concept of inventory management by a third party. Employees should be given
a complete overview of VMI and the benefits the organization receives from the
VMI process. The support of inventory analysts, e-business analysts and
replenishment planners are very essential for the success of this program.

2. DATA SYNCHRONIZATION AND EDI SET UP

The product data like UPC and other catalog information should match between
retailer and vendor. Prior to start up, product data should be audited and
differences with respect to product data should be resolved. Also, a process for
communicating the product data changes should be established.
Ensure that the vendors are setup in EDI system. Verify and validate that the
inbound and outbound transmission occurs as intended and in accurate manner.
EDI testing is an iterative process and should be done covering all possible
documents exchanged and for all types of products.

3. SETTING UP THE AGREEMENTS

As discussed earlier, in the VMI process, the vendor creates the order and
maintains the stocking plan for the retailer. To avoid situations where retailers
question suppliers regarding the creating of orders for a product that they did not
require and to prevent over and under allocations scenarios, agreements on
inventory turns, fill rates, frequency of replenishment and SLAs should be
predetermined.

4. DATA EXCHANGE

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Two types of data exchange occur between retailer and supplier. One is a one-time
exchange of retailer’s sales history that allows the supplier to base the inventory.
The second type of data exchange is ongoing product activity data exchange.
Product activity data exchange primarily contains quantity on-hand, sales volumes,
back orders and returns. Product activity data exchange can be daily/weekly
depending on the need. EDI-852 is the EDI document that is used for product
activity data exchange.

5. ORDERING
Upon receiving the EDI-852 data, the vendor calculates the reorder point (ROP)
for each item based on the movement of data and any overriding guidelines
established. The quantity available with retailer is then compared to the calculated
reorder quantity at the item/location level and order quantities are determined. The
created orders will be communicated to the retailer using the EDI-850 document.
Some partners use EDI-855 (PO acknowledgement document) in addition to EDI-
856. The 856 is sent before the shipment has been made. When it comes to
fulfillment, the VMI customers generally receive priority service for
replenishment. Since vendors control the forecasting and fulfillment, even package
quantities can be modified to reduce processing at customer receiving facilities.

6. INVOICE MATCHING

Once the retailer receives the product, invoices are matched and payments will be
made to the supplier accordingly. The important point in VMI is the ownership of
the inventory. VMI does not change the ownership of the inventory.

7. MEASUREMENT

An effective measurement process should be agreed upon and implemented to

monitor the success of VMI. This should include improvements in inventory
turnover, stock availability, inventory reduction and distribution.

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 Shows a Retail Industry Example That is Described Below

BENEFITS OF VENDOR MANAGEMENT INVENTORY

The VMI brings benefits for both retailers and suppliers. Some of those benefits
are listed below.

1. RETAILER BENEFITS

• Reduced inventory: This is the most obvious benefit of VMI. Using the
VMI process, the supplier is able to control the lead-time component of
order point better than a customer with thousands of suppliers they have to
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 deal with. Additionally, the supplier takes on a greater responsibility to have
the product available when needed, thereby lowering the need for safety
stock. Also, the supplier reviews the information on a more frequent basis,
lowering the safety stock component. These factors contribute to
significantly lower inventories.

• Reduced stock-outs: The supplier keeps track of inventory movement

and takes over responsibility of product availability resulting in a reduction
of stock outs, there-by increasing end-customer satisfaction.

• Reduced forecasting and purchasing activities: As the supplier does

the forecasting and creating orders based on the demand information sent by
the retailer, the retailer can reduce the costs on forecasting and purchasing
activities.

• Increase in sales: Due to less stock out situations, customers will find the
right product at right time. Customers will come to the store again and again,
there-by reflecting an increase in sales.

2. SUPPLIER BENEFITS
• Improved visibility results in better forecasting: Without the VMI
process, suppliers do not exactly know how their customers are going to
place orders. To satisfy the demand, suppliers usually have to maintain large
amounts of safety stocks. With the VMI process, the retailer sends the POS
data directly to the vendor, which improves the visibility and results in better
forecasting.

• Reduces PO errors and potential returns: As the supplier forecasts and

creates the orders, mistakes, which could otherwise lead to a return, will
come down.

• Improvement in SLA: Vendor can see the potential need for the item
before it is actually ordered and right product is supplied to retailer at right
time improving service level agreements between retailer and supplier.
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 • Encourages supply chain cooperation: Partnerships and collaborations
are formed that smooth the supply chain pipeline.

CURRENTLY USE OF VMI

Mostly Vendor Management Inventory is use in all type of industries. Now a days
the concept of VMI are adopting in a very widely sense. Mainly it is use the:-

• Many big box retailers (Wal-Mart)

• Oil companies

• Procter & Gamble

VMI helps foster a closer understanding between the supplier and manufacturer by
using Electronic Data Interchange formats, EDI software and statistical
methodologies to forecast and maintain correct inventory in the supply chain.
Vendors benefit from more control of displays and more contact to impart
knowledge on employees; retailers benefit from reduced risk, better store staff
knowledge (which builds brand loyalty for both the vendor and the retailer), and
reduced display maintenance outlays

CHALLENGES AND LIMITATIONS OF VMI

The VMI approach has its own set of challenges and limitations:
• Some companies continue to manufacture to stock without leveraging
customer specific data effectively for production planning
• In order to provide priority service to VMI partners, some vendors reserve
Inventory resulting in shortages to other customers
• Insufficient level of system integration results in incomplete visibility
• High expectations from retailers
• Resistance from sales forces due to concerns of losing control, effecting
sales based incentive programs
• Lack of trust and skepticism from employees

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 OVERCOMING THE LIMITATIONS
Effective implementation of VMI depends on smoothly overcoming the limitations
and addressing the concerns of various stake holders. Some of the concerns can be
addressed as explained below:
• Redefine incentive programs based on partnership building instead of sales
volume
• Build strong partnerships with management commitment to effective
communication, active sharing of information, commitments to problem
solving and continued support
• Conduct simulations and pilots before actual implementation
• Organize training sessions before launching VMI program
• Set reasonable targets for benefits of VMI
• Establish agreements on service levels and process to handle exceptions

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 CONCLUSION

Vendor-managed inventory (VMI) is one of the most widely discussed partnering

initiatives for improving multi-firm supply chain efficiency. Supply chain
optimization requires efficient and accurate transfer of information with in all the
members of the chain. The management of inventory by the supplier continues to
draw attention in many industries. We have addressed the benefits attributed to
VMI by describing the practice and by applying rigorous simulation analysis. Our
scenarios were designed to demonstrate the effect on VMI of demand variability,
partial adoption of the approach, and limited manufacturing capability. VMI
facilitates that transfer of information and provides cost saving opportunities to
both vendors and retailers. Success in supply chain management usually derives
from understanding and managing the relationship between inventory cost and the
customer service level. The most attractive projects yield improvements along both
dimensions, and this is certainly the case with VMI. To begin, we examine how
each partner in a VMI relationship reduces cost and improves service. Now a day it
is use in every industry in very wide way. So I can say that Vendor Management
Inventory is so important for all type of industries. Supply chain uses almost in
every sector so it is importance increase more.

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 BIBLIOGRAPHY
• http://www.vendormanagedinventory.com

• http://www.quickmba.com

• http://www.i2.com

• http://www.wikipedia.com

• http://www.jadaman.com

• http://www.scribd.com

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