What is Vendor Managed Inventory? Description
Vendor Managed Inventory (VMI) is a supply chain practice where
the inventory is monitored, planned and managed by the vendor on behalf of
the consuming organization, based on the expected demand and on previously
agreed minimum and maximum inventory levels. Traditionally, success in supply
chain management derives from understanding and managing the tradeoff between
inventory cost and the service level. VMI projects can result
in improvements along both dimensions. At least 2 forms can be distinguished:
- A wholesaler (distributor) manages inventory levels for a retailer.
VMI in this context is also called Efficient Consumer Response (ECR).
Note that the retailer still owns the inventory, even though the replenishment
order is triggered by the wholesaler.
- A manufacturer manages inventory levels for a distributor. Note that
the distributor still owns the inventory, even though the replenishment
order is triggered by the manufacturer.
VMI is based on the belief that supplying parties are in a better position
to manage inventory as they have better knowledge of the goods production
capacities and lead times. Also it is based on the belief that allowing vendors
to manage inventory reduces the number of layers in the supply chain, increasing
stock visibility and reducing overall inventory levels. To enable VMI, sales
data must be provided to the vendor via Electronic Data Interchange (EDI),
other electronic means, or via traditional human agents at outlets.
Compare also: RFID Technology.
Other terms for VMI are Continuous Replenishment and Supplier
Origin of Vendor Managed Inventory. History
VMI started in the retail business and grew out of Efficient Consumer Response
(ECR), where consumer satisfaction or rather consumer expectation of stock
availability is an important way to have a competitive edge over others. Wal-Mart
is one of the successful pioneers of this supply chain strategy.
VMI is now gradually progressing towards strategic-partnership based forms.
This influences the way companies plan their inventory, evolving to Collaborative
Planning, Forecasting and Replenishment (CPFR).
Usage of Vendor Managed Inventory. Applications
- Error sensitive industries. Example: Pharmaceutical Sector.
- Multiple outlets, fast-moving consumer goods. Example: Wal-Mart.
- Perishable goods. Example: K Mart.
- Valuable and unpredictable components. Example: PC manufacturing. Compare:
- Strong competition (small margins). Example: Automotive.
Steps in Vendor Managed Inventory. Process
VMI should be achieved in a number of phases:
- Communicate expectations of all parties.
- Retailer/distributor must commit to sharing precise information.
- Vendor must ensure reliable transmission, receipt, and use of information.
- Agreement on ordering policy, risk and reward sharing.
- Commit time and resources.
- Extensive testing.
- Implementation and evaluation. Adjust.
- Appreciate vendors that manage the inventory well. Example: promotion
to Category Captain, profit sharing schemes, etc.
Strengths of Vendor Managed Inventory. Benefits
- Supply Chain level:
- Lower inventory levels at total supply chain level.
- Less overhead.
- Increased sales.
- Reduces human data entry errors.
- Better insight in customer demand (better resource usage, reduced
raw and finished goods inventories).
- Improved, more direct communication with customers. Improved market
- Increased sales via lower out of stock rates.
- Opportunity to provide category management and other value-added services.
- Reduced replenishment times and lower inventory costs.
- Increased sales through reduced stock outs.
- Less redundancy.
- Build strategic strengths through establishing strong supply chain
- Vendor assistance with category management.
- Increased service level.
- Reduced stock outs.
Limitations of Vendor Managed Inventory. Disadvantages
- Success of VMI initiative depends on the strength of relationship between
the vendors and retailers.
- Increased dependency between the parties and increased switching costs.
- Lack of trust to exchange data can result in the ineffective implementation
in one or more of the following forms:
- Inventory invisibility.
- Inventory imbalance.
- Costs of technology and changing organization.
- Extensive data- and EDI testing is needed.
- Loss of necessary shelf space at the selling party may result in less
attention by buyers, compared to competitors that are not into VMI yet.
- Special promotions or events need to be communicated beforehand to avoid
replenishment planning mistakes (loss of flexibility).
- Increased vulnerability for non-foreseeable risks such as employee strikes,
hurricanes, etc. due to lower inventory levels.
- Most of the benefits are for the end client and for the selling party,
while the vendor does much of the work.
Assumptions of Vendor Managed Inventory. Conditions
VMI is usually successful for industries and organizations with the following
- Multiple outlets, because this increases the benefits compared to traditional
- Severe consequences in case of human errors (Pharmaceutical).
- Industries with steady and high volumes (Retail, Consumer Products).
- Industries with high-value inventory and a high level of demand unpredictability
- Management with strong leadership capability to form strategic long
term partnerships (Automotive).
Book: Edward, A Silver - Inventory Management and Production
Planning and Scheduling -
Book: David Simchi-Levi - Designing and Managing the Supply Chain
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Vendor Managed Inventory Special Interest Group
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Compare with Vendor Managed Inventory:
3rd Party Logistics (3PL)
| CPFR |
Quality Function Deployment
| Core Competence |
Business Process Reengineering |
| Value Chain |
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