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Vendor Managed Inventory



During thisprocess thesupplier isguided by

mutually agreedto objectives for

inventorylevels, fill ratesand transaction

costs.

There are twoEDI transactions

at the heart ofthe process.

VMI is a process where the supplier generates orders for the customerbased on demand information sent by the customer.



Determining appropriate order quantities

Managing proper product mixes

Configuring appropriate safety stock

Why VMI?

Global supply chains complex compared to domesticones

Reduction in inventory carrying costs Fewer supply chain professionals



Supply Chain level: Lower inventory levels at total supply chain level.

Less overhead.

Increased sales.

Reduces human data entry errors.

End-users:

Increased service level.

Reduced stock outs.

IncreasedSales

Lower

Administrative Costs

Lower

supplierinventory

LowerCustomerInventorie

s

ReducesBull-Whip

Effect



Suppliers:

Reduced replenishment times and lower inventory costs.

Increased sales through reduced stock outs.

Less redundancy.

Build strategic strengths through establishing strong supply chainrelationships.

Vendor assistance with category management.

Vendors:

Better insight in customer demand (better resource usage, reduced rawand finished goods inventories).

Improved, more direct communication with customers. Improved marketanalysis.

Increased sales via lower out of stock rates.

Opportunity to provide category management and other value-addedservices.



Manufacturers: Lower inventory investments (raw and finished) Better scheduling and planning Better market information

Closer customer ties and preferred status

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



Success of VMI initiative depends on the strength ofrelationship between the vendors and retailers.

Increased dependency between the parties andincreased switching costs.

Lack of trust to exchange data can result in theineffective implementation in one or more of thefollowing forms:

Inventory invisibility.

Inventory imbalance.

Costs of technology and changing organization.

Extensive data- and EDI testing is needed.



Special promotions or events need to be communicatedbeforehand to avoid replenishment planning mistakes(loss of flexibility).

Increased vulnerability for non-foreseeable risks such asemployee strikes, hurricanes, etc. due to lower inventorylevels.

Most of the benefits are for the end client and for the

selling party, while the vendor does much of the work.



Phenomenon observed in forecast driven distributionchannels Is basically the amplification of the demand variance

up the supply chain, from customer to factory , asdemand information passes back through the supplychain.

Issues: Excess Inventories Quality Problems

Increased Raw Material Costs Increased Shipping Costs Lost Sales Lost Customer Service



Company X produces widgets for sale on the openmarket

Customer demand for Company X’s widgets becomestagnant

Retailers offer a sale promotion to boost sales ofCompany X widgets

Retailers fail to notify manufacturers of sales promotion

Company X assumes that the demand for widgets has

increased Company X increases inventory to allow for increased

manufacturing of widgets

Company X notifies part suppliers of increased demand

Suppliers increase inventory to meet demand



Distorted information along the supply chain causedthe inventory levels to increase along the supply chain

which may result in increased inventory costs, poorcustomer service, adjusted capacity and other problemswhich are associated with the Bullwhip Effect



Demand Forecast Updating

Rationing Gaming

Order Batching Price Variations



Given customer demand and stock levels, supplierscan automatically replenish a trading partner’sinventory without the need for approved purchaseorders

3 Primary Dimensions of VMI Implementation

Information Technology

Process Redesign Organizational Support



Information Technology Global VMI : A tool for effective supply chain

management

Sole use for replenishment decisions

Investment in IT to enable supply chain visibility Use of Global VMI for real time supply chain integration

Process Redesign

Change in roles and responsibilities of personnel Investment in redesigning the supply chain to link more

effectively with suppliers/customers

Modification of supply chain activities (eg: Purchasing,order fulfillment process etc) during and after Global VMI

application



Organizational Support Strategic Imperative : Optimization of supply chain

performance and achieving competitive advantage

Management and Organizational Support : Supportfrom Purchasing/Sales Dept, IT Support and Topmanagement support

Supplier and Customer Relationship : Satisfyingmutual needs, Cross investment on major projects,Cross organizational team to manage replenishment,Negotiating service levels and inventory targets



1. Maximize sharing and integration of data2. Aggressively invest in ICT to enable supply chain

visibility and real time integration of supply chain

3. Select, design and implement VMI applications that

are congruent with company’s business processes 4. Redesign supply chain processes to align with

customers/suppliers

5. Redefine roles and responsibilities of personnel

6. Obtain senior management and organizational support

7. Charge a cross functional team with responsibility tobuild trust and manage connected activities with otherpartners

8. Be proactive



e-grocers go out to conquer market shares withessentially only one service - home delivery ofordered goods, as their competitive weapon.



E-grocery currently caters to only the Shopping avoiders,necessity users, new technologists. It does not attract thetime starved, responsible and traditional shoppers.



The current competitive advantage of e-grocerswould be nullified if the traditional grocersstarted home delivery of goods.

The electronic communication channel betweenthe e-grocers and the customers is not fullyexploited and is currently used only for datatransfer.

Availability of technologies like bar code and

RFID



Value Proposition:

e-grocer takes responsibility for its customers'product availability.

E-grocer would be able to create real, concretevalue as most people do not really enjoyordering the same basic products day after daybut merely want their households to beequipped with what they need when they need

it.



1) Data Capture

2) Data transfer

3) Data Management



The data communication infrastructure hasalready been created by the e-grocers when theystarted using data transfer over the Internet as ameans for displaying product information as well

as receiving orders. The inventory management component can be

created along the principles of applicationservices that are now launched to small

businesses. The big issue is to come up with a good solution

to the data capture problem



Profiles based on buying habits

Data capture in the household



What does it mean?

The e-grocer can create customer profiles thatreflect the individual buying habits of thesecustomers. The profiles can then be used in

order to predict each customer's future needs. Advantage:

Technology needed for gathering dataalready exists.

Problem:Uncertainty is inherent in a system that reliessolely on predicting the future based onhistorical data



Alternatives:

1) Flow control based data capture – Data on a material floware collected

2) Inventory count based data capture - Data on themomentary inventory situation are regularly collected



Requires active customer participation as he needs tonotify the data capture system each time an item isadded to removed from the inventory system.

Easy to implement as only an Internet connection and a

bar code reader are needed.E.g – Refrigerator equipped with Internet connectionand a bar code reader.



The reader device performs an inventory count by

regularly scanning what items are currently storedin, for example, the customer's refrigerator. The inventory data obtained are then sent over the

Internet to the e-grocer. Next, the database entries corresponding to this

customer's inventory are updated. The e-grocer'sinventory management system checks if thecustomer is running low on any of the items.

When needed, the system schedulesreplenishments to the customer.



Challenges for use of RFID:

Technology availability

Cost effectiveness

Possible Solution:Re-progammable recyclable tags.



Variety

Large Package Sizes



Customer

No need to remember what and when to order

E-grocers Competitive advantage over traditional grocers

Increased customer loyalty

More stable demand

More knowledge about the customers



Existing model suits only continuous demand

More research is also required in order todiscover what new value offerings will be neededfor the e-grocers to be able to offer also different

kinds of demand more efficiently.

A ``plan and forget'' calendar based servicecould, for example, be the answer to occasionaldemand and a ``capture and enjoy'' service a

way to capture impulsive, irregular demand.



Vendor Managed Inventory (VMI) is designed tofacilitate transfer of information through aninformation system and to provide major cost savingbenefits to both suppliers and retailers customers.

As part of the program-

The retailer supplies the vendor with theinformation necessary to maintain just enoughmerchandise to meet customer demand.

This enable the supplier to better project andanticipate the amount of product it needs to produceor supply.



VMI is a backward replenishment model where thesupplier does the demand creation and demandfulfilment.

Instead of the customer managing his inventory and

deciding how much to fulfil and when, the supplierdoes.

With information available at a more detailed level, itallows the manufacturer to be more customer-specific

in it’s planning. VMI concepts are being applied at both the distribution

center-level and the store-level.



The retailer and the supplier must establish clearguidelines on inventory levels and fill rates.

The VMI process involves exchange of critical andsensitive information between retailer and supplier.

If this data is not shared or not accurate as per theestablished guidelines, it will have severe impact onthe overall success of the VMI process.



Management Commitment and Buy-in from Inventory Staff Employees should be given a complete overview of VMI Objectives of this process should be communicated to the organization The support of inventory analysts, e-business analysts and

replenishment planners are very essential for the success of this program.

Data Synchronization and EDI Set Up The product data and other catalogue information should match

between retailer and vendor. Product data should be audited and differences with respect to same

should be resolved. Process for communicating the product data changes should be

established. Ensure that the vendors are setup in EDI system.

Setting up the Agreements Agreements on inventory turns, fill rates, frequency of replenishment

and SLAs should be predetermined.



Data Exchange Two types of data exchange occur One is a one-time exchange of retailer’s sales history that allows the

supplier to base the inventory. The second type is ongoing product activity data exchange.

Ordering The vendor calculates the reorder point (ROP) for each item based on

the movement of data and any overriding guidelines established. The VMI customers generally receive priority service for

replenishment.

Invoice Matching

Measurement The parameters used to measure success of VMI are improvements in

inventory turn over, stock availability, inventory reduction anddistribution.



Successful implementation of VMI often depends oncomputer platforms and communication technologyboth at the retailer and supplier end

Electronic data interchange (EDI) is an enabler, but not

a requirement for VMI.

Uniform Communication Stds. defined by UniformCode Council

UCS 852: Warehouse withdrawal and inventory

information

UCS 855: Supplier replenishment decisions

UCS 856: Advance shipment data



The Impact of Vendor Managed Inventory on the Bullwhip Effect inSupply Chains by Allan Neves Portes & Guilherme Ernani Vieira

http://en.wikipedia.org/wiki/Bullwhip_effect

“Enhancing Business Performance via Vendor Managed InventoryApplications” by Peter Duchessi and Indushobha Chengalur-Smith

“Use VMI to improve forecasting” by Larry Lapide, PhD, The Journal ofBusiness Forecasting at MIT

“Vendor Managed Inventory” by Rajiv Saxena, VP of global supply chainengineering at APL Logistics

“What is VMI? “, Carl Hall, Enterprise Data Management, Inc. Copyright

2001. VMI: Very Mixed Impact, James Aaron Cooke, Senior Technology Editor,

Logisticsmanagement.com

http://www.12manage.com/methods_vendor_managed_inventory.html





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