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Vendor Managed Inventories or VMI

             VMI is essentially a distribution channel operating system whereby the inventory at the distributor/retailer (dist/ret) is moni... thumbnail 1 summary

             VMI is essentially a distribution channel operating system whereby the inventory at the distributor/retailer (dist/ret) is monitored and managed by the manufacturer/vendor (mfg/vend).  It includes several tactical activities including, determining appropriate order quantities, managing proper product mixes, and configuring appropriate safety stock levels.  The rationale is that by pushing the decision making responsibility further up the supply chain, the mfg/vend will be in a better position to support the objectives of the entire integrated supply chain resulting in a sustainable competitive advantage.  Centralizing the replenishment decision also helps reduce the distortions in ordering introduced when there are several intermediaries that place orders in a Supply Chain.

            VMI is typically the opposite of the Inventory Management approach taken by most organizations today.  Currently, orders are pulled through the supply chain by each partner as inventory levels reach "replenishment/re-order" points.  This historic approach only serves to incent channel partners to optimize their individual link in the supply chain at the expense of sub-optimizing the overall supply chain.  VMI, on the other hand, works in the reverse to link partners together and to grant authority to the partner who is in the best position to make inventory replenishment decisions.  This entity is usually the mfg/vend partner given its upstream position in the channel.

            Historical improvements in Supply Chain effectiveness have been achieved through efficiency gains.  These include spending less time on physical inventory counts, less time finding misdirected Inventory, and less time entering data into large customized systems.  Even innovations such as cross-docking were essentially ways of accelerating the distribution system and reducing the cost of intermediate steps.  Advance shipping notices (ASNs), bar coding and other electronic enhancements brought savings by decreasing supply chain inventory, speeding up the distribution process and saving handling costs for both shipper and receiver.  VMI, however, includes these concepts but is also the first approach which allows information to be used more intelligently.  Therefore, a strategic element as well as a technological competency are the two primary mechanisms necessary for successfully gaining benefits from VMI.

            The enabling technology behind successful VMI is electronic data interchange (EDI) which provides mfg/vends with essentially the same point of sales (POS) and inventory information retained by the dist/ret.  As a result, improved forecasting is possible because the mfg/vend can observe Demand for its product over a wider range of Customers and can incorporate the effects of promotions, competing products, and seasonal variations in demand. Therefore, successfully integrating systems technology in the transactions between value chain participants is integral to realize benefits of VMI.

            Technically, VMI has existed for far longer than has EDI and related concepts.  For example, Frito-Lay deliver truck drivers restock retailers' shelves without first going through the store owners because involvement from store management would be non-value added.  EDI simply allows VMI to be applied to a broader range of products and for more value-adding analysis to be conducted on available data.  Nevertheless, organizations that are taking VMI to test have begun to realize that a "tailored" approach to incorporating both the strategy and technology is essential to success.

 Issues When Introducing VMI

            Initial problems with VMI often relate to systems/data limitations.  Initially it is probably best to narrow the focus of VMI and to better understand configuration, operational, and procedural issues prior to larger-scale implementation. For success it is key to be able to move vendor relationships in a direction of minimizing total Supply Chain cost for all stakeholders.  The  cost saving benefits will then  be available to all parties.  A pilot program may incorporate the following elements

·         A few vendors (any that are already running VMI with other customers) who represent top suppliers in terms of relationship, competency, and willingness to test VMI concepts in an active supplier-distributor relationship should be considered.
·         An EDI protocol standard to transmit information nightly has to be agreed upon.
·         A set of SKUs involved must be decided upon.
·         Initially a high degree of human involvement may be required till the system stabilizes.

            At this point, the pilot program often runs into process and conceptual concerns that are
typical of organizations moving to true full‑scale VMI. These include:

·         The belief that the dist/ret can manage its Inventory better than their vendors due to the customized nature of their systems and the responsiveness of their replenishment team, and their dedication to minimizing inventory while maintaining appropriate stocking levels in support of high customer cycle service rates.
·         The limitations of existing computer system.

            The overall goal must be to support total value chain cost minimization by pushing decision making on replenishment activities furthest up the Supply Chain.  This approach supports cost savings because the value of pooling orders and producing to accurate demand patterns with timely information (i.e., variability minimization) yields lower inventory investment if executed effectively.  The complexity, however, is in allocating the savings gained to each participating supply chain stakeholder effectively and fairly.
            As a benchmark to measure progress of the pilot program, the company can initiate improvement goals for vendors involved in the pilot program.  However it is important that VMI be implemented in its truest sense, else it will be difficult to assign a cause to any failures.

            Pilot programs tend to reveal several challenges for implementing the concept: redefining the relationship with the vendor, handing over previously considered proprietary information, new processes and job tasks, setting up new metrics for measuring the vendor's performance, and establishing electronic connections are some of the key issues. These and other issues will need to be resolved collectively by Supply Chain partners and can take considerable time but, nevertheless, move the organization in the right strategic direction.