Vendor Managed Inventory (VMI)

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For any organization, managing Inventory is one of the biggest tasks at hand. Ensuring it is under the specified level, simultaneously making sure it does not run out when needed, is a herculean task in itself.

WHAT IS VMI:

Vendor managed inventory or VMI is an integrated inventory management approach that offers relief from the inventory concerns. In VMI, the inventory at the buyer’s end is managed and monitored essentially by the supplier/vendor or the upstream supply chain partner.

“Vendor Managed Inventory is the term for inventory management systems where the supplier manages the day to day inventory activity. In a VMI relationship, the manufacturer becomes responsible for the management of his customer’s inventory.” (Pol, Inamdar, 2012)

VMI is a reverse inventory replenishment process that electronically connects supply chain partners to felicitate demand and inventory replenishment planning based on real-time demand information sharing between them.

VENDOR MANAGED INVENTORY

One of the most common instances of VMI implementation in business is the relationship between Walmart and P&G. P&G is responsible for managing the agreed inventory of P&G products on Wal-Mart’s store shelf space based on the real-time sales data shared by Walmart.

WHY SHOULD ONE IMPLEMENT VMI?

VMI offers a symbiotic relationship. Hence, it reduces the chances of stock out occurrences along with ensured inventory reduction. Also, to manage and monitor the consumption, the vendor might place its representatives on site, at the retailer’s end. This way the vendor can ensure that their product display at the store is as per expectations and the retail staffs at the store are also aware or accustomed with the product features which will aid not just the retailer but the vendor in increasing the sales of the products.

VMI offers the benefit of shared risks between the two involved parties, i.e. if the inventory fails to sell off the shelves, the vendor might repurchase it from the retailer or the ownership of the product might have been with the vendor until final sales take place, an arrangement known as ‘consignment’.

VMI implementation is beneficial especially in retail industry and consumer packaged goods, where the product demand is relatively stable with short term fluctuations. Also, high volume but smaller sized or smaller monetary value products can be managed by VMI.

HOW DOES THAT WORK?

A VMI begins by the concerned people agreeing upon the following objectives:

• Inventory turns: the no. of times the inventory is replenished

• Fill rates/in-stock percentages: is a measure of an inventory’s ability to meet demand. It is mainly concerned about the percentage of customers satisfied from stock at hand

• Transaction costs: how much total worth of transaction do both the parties do

The customer sends a Product Activity Report which contains demand information such as:

• sales and transfers

• *on-hand, *on-order and *in-transit inventory position information for the items that have changed in due time

The software then analyzes the data and creates recommendations for replenishing the orders. These recommendations are based on algorithms which use factors such as forecasts, the frequency of sale, and dollar velocity of sales. These include:

• Periodic review and calculation of order points and order quantities based on movement data and special situations such as promotions, seasons, etc.

• Frequent comparison of on-hand inventory to order point
The supplier’s planner reviews the recommended orders and any exceptional conditions before approving them. The VMI system then sends:

• A Purchase Order to the supplier

• A Purchase Order Acknowledgment to the customer

VARIATIONS OF VMI:

There are two popular VMI variations based on the parties involved in the program:

1. Inventory-driven VMI
– The VMI relationship between manufacturer and its suppliers
– Manufacturers have the forecasting control in their hands.

2. Consumption-driven VMI
– The VMI relationship between retailers and their vendors
– The forecasting control is in the hands of the vendor based on the point of sale information available.
– Inventory replenishment is driven by the consumption on the point of sale at the retailer’s location rather than inventory levels at the retailer’s location.

COMMON MISTAKES MADE WHEN IMPLEMENTING VMI:

VMI implementation is a long term plan and requires continuous involvement and efforts from both the parties involved. Hence, development of a clearly defined and practical implementation plan is crucial for VMI’s success.

The biggest roadblock to VMI’s success will be keeping and monitoring the internal resources allocation. Before organization-wide system implementation or before the system is live, the team should ensure all the involved internal elements of software, people, and processes are aligned well and functioning as needed. Pilot runs and prototype tests can be beneficial to avoid any glitches in the system once actual work starts.

The most common mistake that can happen is to forget the people who are involved. VMI cannot be implemented successfully without proper change management and people involvement. Hence proper planning and training of the buyers, technicians, planners and the other auxiliary staff involved is crucial.

VMI BENEFITS:

Benefits of VMI to the Buyer:

• Reduced inventory as the safety stocks needed earlier is reduced considerably.
• Reduced stock-outs / shortages as the supplier manages his own inventory rather than the retailer who is managing thousands of products from hundreds of suppliers.
• Higher sales as the stock outs are reduced.
• Reduced administrative and labor costs of daily inventory management, planning and order processing.

Benefits of VMI to the Supplier:

• Reduction in safety stocks as the actual real-time demand information is readily available due to increased visibility.
• Reduction in errors related to the purchase orders.
• The actual customer need can be foreseen and hence supplier can plan her operations accordingly.
• Strategic relationships are formed with the buyers.

VMI LIMITATIONS:

It can encourage the vendor to directly cater to the customers in future, as they get the information and idea as to what the customer needs and demands and how the customer need can be fulfilled.

Also, the actual customer experience now shifts from the hands of the retailer to the hands on the vendor and thus can backfire if not managed properly.

Though these disadvantages can deter a company in implementing VMI, they can counter by better engagement and forming long-term strategic partnerships with the vendors in the first place.

*On-hand inventory: is the quantity physically present in your warehouse.

*On-order inventory: is the quantity ordered by the customer but is not yet shipped by the source

*In-transit inventory: is the merchandise and other inventory items that have been shipped by the seller, but have not yet been received by the purchaser.

 

References:

S.M. Disney, D.R. Towill (1980). Vendor-Managed Inventory and bullwhip reduction in a two-level supply chain. International Journal of Operations & Production Management, Volume 23, Issue 6, Pages 625-651. doi:
10.1108/01443570310476654

Yuliang Yao, Philips T. Evers, Martin E. Dresner (March 2007). Supply chain integration in vendor-managed inventory. Decision Support Systems, Volume 43, Issue 2, Pages 663-674. doi:10.1016/j.dss.2005.05.021

S.M. Disney, D.R. Towill (11 August 2003). The effect of vendor managed inventory (VMI) dynamics on the Bullwhip Effect in supply chains. International Journal of Production Economics, Volume 85, Issue 2, Pages 199-215. doi: 10.1016/S0925-5273(03)00110-5

Sila Centinkaya, Chung-Yee Lee (1 February 2000). Stock replenishment and shipment scheduling for vendor-
managed inventory systems. Management Science, Volume 46, Issue 2, Pages 217-232. doi: 10.1287/mnsc.46.2.217.11923

G.J. Pol, K.H. Inamdar (July 2012). Framework to implementation for vendor managed inventory. International Journal of Engineering Research and Development, Volume 2, Issue 3, Pages 46-50. eISSN : 2278-067X, pISSN : 2278-800X, www.ijerd.com

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