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Vendor Managed Inventory (VMI)

VMI is essentially an integrated approach whereby the inventory at the distributor/retailer (downstream) is monitored and managed by the manufacturer/vendor (upstream)

Customer A

Vendor
Customer B Customer C

VMI underlying principal


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

Choose the correct answer:


1. Optimizes supply chain performance 2. Supplier has access to customers inventory data 3. Supplier is responsible for maintaining the inventory level required by the customer 4. The process is to resupply inventory by the vendor via scheduled reviews 5. All of the above

Questions for Selecting VMI

What are your intentions? What are the critical materials? Which items/commodities have attributed to the greatest delays?

Typical Benefits to Manufacturers


Lower inventory investments (raw and finished) Better scheduling and planning Better market information Good relationship with customer Visibility via information sharing

Typical Benefits to Retailers


Fewer stock-out with higher inventory turnover Better market information Less inventory in channels (transfer costs) Lower administrative replenishment costs Greater customer satisfaction Reduce cycle time

VMI success factors


Top management commitment Focus on effort Trust and partnership between supply chain stakeholders Highly effective computer/information systems (EDI, Bar coding, Scanning) Competent manufacturers and the ability to forecast Willing stakeholders partners and patience

Electronic Data Interchange (EDI)

EDI is Computer to computer exchange of business transaction in a standard format

EDI Benefits

Quick access to information Reduced labor and material costs associated with handling paper-based business transaction Better communication Increases productivity Improved tracing and expediting Improved billing Better customer service

Ownership of inventory in VMI

Initially, ownership transferred to retailer upon receipt of goods Now, VMI is based on consignment relationship in which manufacturer owns goods until sold
Retailer benefit: lower inventory cost Manufacturers benefits: better control Supply chain benefit: system-wide cost reduction

Requirements for Effective VMI Advanced information systems Top management commitment Mutual trust Information sharing Management of the entire supply chain Initial loss of revenues

Important VMI Issues

Inventory ownership:
Who owns inventory In case of Supplier owns the goods until they are sold
Why would a firm do this?

Confidentiality Communication and cooperation


When one Vendor started partnering with Kmart, Kmart often claimed that its supplier was not living up to its agreement to keep two weeks of inventory at all times. It turned out that this was due to the fact that the two companies employed different forecasting methods.

Performance Measurements How to ensure VMI will enhance the business? Operational improvements
Internal
The number of stock outs and duration Cost of material/service before and after

External
Customer satisfaction
Improvement of delivery availability
Competitive advantage considerations