vendor managed inventory

Vendor Managed InventoryVendor Managed Inventory (VMI) (VMI)

VMI is essentially an integrated VMI is essentially an integrated approach whereby the inventory approach whereby the inventory

at the distributor/retailer at the distributor/retailer (downstream) is monitored and (downstream) is monitored and managed by the manufacturer managed by the manufacturer

(upstream)(upstream)

VMI rationale ….VMI rationale ….By pushing the decision making By pushing the decision making

responsibility further up the supply responsibility further up the supply chain, the manufacturer/vendor will be chain, the manufacturer/vendor will be

in a better position to support the in a better position to support the objectives of the entire integrated objectives of the entire integrated

supply chain resulting in sustainable supply chain resulting in sustainable competitive advantagecompetitive advantage

VMI includes …VMI includes …• Determining appropriate order

quantities• Managing proper product mixes• Configuring appropriate safety stock

Typical Benefits to Typical Benefits to ManufacturersManufacturers

• Lower inventory investments (raw and finished)

• Better scheduling and planning• Better market information• Closer customer ties and preferred

status

Typical Benefits to RetailersTypical Benefits to Retailers• Fewer stock-out with higher

inventory turnover• Better market information• More optimal product mix• Less inventory in channels (transfer

costs)• Lower administrative replenishment

costs

VMI Success FactorsVMI 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 Electronic Data Interchange EDIInterchange EDI

computer to computer computer to computer exchange of business exchange of business

transaction in a standard transaction in a standard formatformat

EDI Benefits …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 inventoryOwnership of inventory• 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 Requirements for Effective SP(Strategic Partnering)SP(Strategic Partnering)

• Advanced information systems• Top management commitment

– Information must be shared– Power and responsibility within an organization

might change (for example, contact with customers switches from sales and marketing to logistics)

• Mutual trust– Information sharing– Management of the entire supply chain– Initial loss of revenues

Important SP IssuesImportant SP Issues• Inventory ownership:

– Retailer owns inventory– Supplier owns the goods until they are

sold (consignment)• Why would a firm do this?

• Performance measures: Fill rate, inventory level, inventory turns

Important SP IssuesImportant SP Issues• Confidentiality• Communication and cooperation

– When First Brands 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.

Steps in SP ImplementationSteps in SP Implementation• Contractual negotiations

– Ownership– Credit terms– Ordering decisions– Performance measures

• Develop or integrate information systems• Develop effective forecasting techniques• Develop a tactical decision support tool to

assist in coordinating inventory management and transportation policies

Examples of SP Successes Examples of SP Successes and Failuresand Failures

• Western Publishing-Golden Books:– Western Publishing is using VMI for its Golden Books line

of children’s books at several retailers.– POS data automatically triggers re-orders when

inventory falls below a reorder point.– This inventory is delivered either to a distribution center,

or in many cases, directly to the store.– Ownership of the books shifts to the retailer once

deliveries have been made.