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Successful VMI programs depend on several critical factors, some of which are not immediately obvious. This has led to much confusion in the distribution and retail industries, as suppliers and buyers have sought to implement VMI as the newest improvement to their existing systems. VMI, while a logical outgrowth of EDI, Efficient Consumer Response (ECR), Category Management (CM) and other programs, is qualitatively different.
VMI depends upon the availability of solid and comprehensive consumer data (POS). Without such "live" information, the benefits of VMI begin to become elusive. The mfg/vend must understand the true nature of POS data and how the dist/ret is using the stock that is ordered. While previously it was sufficient to know that X number of units were ordered, under VMI, the supplier needs to know whether those units were being inventoried (and for how long), whether they were special orders, if they were ordered just to create full truck loads, the number of end users the units were going to, and so on. Moreover, efficient inventory management and production scheduling requires close communication regarding promotions, seasonal variation, and new product introductions and selling incentives that may impact the ability to forecast accurately. Thus, exceptions communication must also be incorporated beyond the automated nature of data transfer under VMI. Close supply chain communication is typically best addressed through routine and ad-hoc conference calls, video conferencing, and email systems.
Problems with VMI
What makes VMI different from EDI and its other incarnations is that it passes control of the supply chain as far up the supply chain as possible to support production pooling and inventory minimization. Thus, VMI should only be implemented in cases where the mfg/vend can forecast demand more accurately than the dist/ret. As pointed out earlier, however, the competency to forecast and determine order levels is a learned capability. This indicates that supply chain partners should decide strategically who should hold such responsibility, and then let that entity develop the competency. Making inaccurate decisions in this area can lead to more problems. As well, change must become quickly adopted as "tweaking" will become the norm not the exception.
Clearly, there are industries where the vagaries of consumer demand, local conditions or market size dictate that the dist/ret should retain control of inventory management. This was the case with K-Mart, which after reducing the number of vendors it worked with and implementing VMI, discovered that its own buyers could do a better job of forecasting consumer demand in certain circumstances. Some market conditions do not make VMI the best solution and a tailored/hybrid approaches need to be explored. Specifically, the "silver bullet" approach will lead to problems if organizations accept VMI as an end-all solution.
One question that could not be resolved in reviewing the activities of many VMI programs is for what type of products VMI will and will not work. This is a complex question where high volume, high turn items, like disposable diapers, are popular candidates because they are low hanging fruit, while "best of breed" organizations have had success in other product types. WalMart and P&G have had a VMI program together for over ten years to manage the inventory and production of disposable diapers, with great success: turns doubled, WalMarts' operating costs fell, and P&G's market share grew (because WalMart gave it preferred shelf space). However, the opinion that non-volatile, low-turn products would also benefit was also expressed, and none of the reported failures revolved around the type of product included in the programs. This may indicate an appropriate starting point to chose mfg/vends that have capabilities but also that produce such products.
Additionally, the answer depends on a number of variables that need to be considered, including:
· What percent of their total volume do the VMI vendors sell through the dist/ret?
· What capabilities do the vendors have in the area of forecasting or retail inventory management?
· How flexible will the system be in the event of required changes and modiications?
· Will there be minimum volume or exclusivity requirements? What product items are being considered?
Another, more fundamental, problem with making vendors responsible for retailers' inventories is the fact that mfg/vends traditionally want to push product (i.e., maximize inventory), while retailers want to minimize inventory (i.e., optimize sales). Overcoming this dichotomy requires trust that both parties are seeking long term profitability. The dist/ret should also assure itself that the interests of the mfg/vend salespeople are aligned with its own. Elements that need to be considered include:
· How will the mfg/vends' salespeople be compensated?
· How will special pricing and promotions be handled?
· How will the benefits of VMI be split?
· What dist/ret sales and volume data should be kept confidential?
· What are the mfg/vends' other channels?
As distribution systems become more sophisticated, the mechanical aspects of providing outstanding service--whether its next day delivery or access to a broad network of manufacturers--will become more accessible to all firms. Service, therefore, from a distribution aspect, may not translate into a sustainable competitive advantage, however knowing which products, in what quantities, and where to store them, may be.