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VMI can provide significant savings for the supply chain over RMI in almost all scenarios capturing nearly
all benefits. VMI can be particularly beneficial for products with high demand variance or high
outsourcing cost. In the last decade, many companies have changed their supply chain structure from
retailer managed inventory (RMI) to vendor managed inventory (VMI) in which the vendor decides the
quantity to be stocked at the retail location(s).
In a true VMI setting, the supplier has the freedom to plan its own production and decide the
replenishment schedules as long as the agreed customer service levels are met. VMI is often
implemented with minimum and maximum levels for inventory and the vendor is responsible in
maintaining those. VMI shifts responsibility in decision making of the replenishment schedule and
inventory management from the customer to the supplier.
The ability to execute VMI effectively can be seen as an organizational capability, which on other hand is
a competitive advantage. A shift from RMI to VMI can involve different changes involving the
implementation of new IT systems to enable the vendor to access point-of-sale data, development of
trust between vendor and retailer, and the role of vendor’s sales force. It also requires a reconsideration
of the supply chain contracts. Analyzing and understanding how supply chain contracts perform under
VMI (and RMI) are important for retailers (online & bricks) and supply chain professionals. Some
popular coordinating supply chain contracts are as presented below:
To enable coordination, the supply chain resorts to contracts. In general, the goal is to write contracts
that induce coordination through appropriate provisions for information and incentives such that supply
chain performance will be optimized.
To ensure that total supply chain costs under VMI are lower than those under RMI. The inventory
quantity variation can be used to obtain different divisions of costs between the retailer and its supplier.
The potential benefit of VMI is greater when demand is more variable.
The benefits to a supply chain from two important attributes of VMI programs: shipment coordination
and stock re-balancing. Shipment scheduling in the context of VMI, the vendor is to coordinate
inventory and transportation decisions.
VMI needs changes mentally, technologically, operationally and contractually so it is not a simple
project to implement without proper preparation. This applies especially in situations where neither of
the parties involved have previous knowledge of setting up a VMI. More planning should be done on
how VMI works in digital-enabled-business relationships and how the technical aspects are handled in
such relationships.