Vendor Managed Inventory

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A supply chain practice where the vendor manages the inventory on behalf of the consuming organization. Explanation of Vendor Managed Inventory. ('88)

Contributed by: Eric Goh See Khai

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Vendor Managed Inventory

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:

  1. 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.
  2. 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 Managed Inventory.


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: Kraljic Model.
  • Strong competition (small margins). Example: Automotive.

Steps in Vendor Managed Inventory. Process

VMI should be achieved in a number of phases:

  1. Communicate expectations of all parties.
  2. Retailer/distributor must commit to sharing precise information.
  3. Vendor must ensure reliable transmission, receipt, and use of information.
  4. Agreement on ordering policy, risk and reward sharing.
  5. Commit time and resources.
  6. Extensive testing.
  7. Implementation and evaluation. Adjust.
  8. 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.
  • Vendors:
    • Better insight in customer demand (better resource usage, reduced raw and finished goods inventories).
    • Improved, more direct communication with customers. Improved market analysis.
    • Increased sales via lower out of stock rates.
    • Opportunity to provide category management and other value-added services.
  • Suppliers:
    • Reduced replenishment times and lower inventory costs.
    • Increased sales through reduced stock outs.
    • Less redundancy.
    • Build strategic strengths through establishing strong supply chain relationships.
    • Vendor assistance with category management.
  • End-users:
    • 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 characteristics:

  • Multiple outlets, because this increases the benefits compared to traditional inventory management.
  • 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 (High Tech).
  • 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 -




Vendor Managed Inventory Forum (6 topics) Help
  The Required Trust in Vendor Managed Inventory
We are a B2B food company that export ingredients in bulk around the world. We compete with local industries and I would like to know if it is possible to use VMI as a competitive advantage in this business.
I have seen many examples showing a l...
     
  Economic Order Quantity Formula
EOQ is the order quantity that minimizes total inventory holding costs and ordering costs. It is used in production scheduling. The formula used to determine this order quantity is also known as Barabas EOQ Model or the Barabas Formula.

C...
     
  How to Maintain Minimum Stock Levels?
Should we maintain minimum stock levels for both fast moving and slow moving stock?
What differences exist in maintaining the levels of each type of stock?...
     
  Vendor Managed Inventory in India
Does anyone have information about any VMI case study in India?...
     
  VMI Between Up / Down Stream Manufacturers
What about establishing Vendor Managed Inventory (VMI) between a manufacturer and its manufacturer (down stream manufacturer)??...
     
  Advantages of Vendor Managed Inventory
Another strength of VMI is eliminating bidding wars while focusing on improved quality and customer service....
     



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Compare with Vendor Managed Inventory:  3rd Party Logistics (3PL)  |  CPFR  |  Outsourcing  |  SERVQUAL  |  Customer Satisfaction Model  |  Quality Function Deployment  |  Core Competence  |  Business Process Reengineering  |  Vertical Integration  |  Value Chain  |  Benchmarking  |  Just-in-time


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