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  1. 1. (VMI) VENDOR MANAGED INVENTORY by Bader Bamegbel Osama Bukhari Abdullah Ja’far
  2. 2. What is VMI? <ul><li>A means of optimizing Supply Chain performance in which the manufacturer is responsible for maintaining the distributors inventory levels . </li></ul><ul><li>The manufacturer has access to the distributor’s inventory data and is responsible for generating purchase orders. </li></ul>
  3. 3. Typical business model: <ul><li>The Distributor places an order from the manufacturer. </li></ul><ul><li>The distributor is in total control of the timing and size of the order being placed. </li></ul><ul><li>The distributor maintains the inventory plan. </li></ul><ul><li>Setup and order cost are included. </li></ul>
  4. 4. VMI Model: <ul><li>Date ( sales & stock levels) are sent from the distributors to the manufacturer via internet or EDI. </li></ul><ul><li>The manufacturer can view every item that the distributor carriers as well as true point of sale data . </li></ul><ul><li>the manufacturer generates the order, not the distributor. </li></ul>
  5. 6. VMI History <ul><li>(VMI) was coined in the USA in the early 1990s. </li></ul><ul><li>The major projects was being implemented by Wal-Mart, K-Mart and Home Depot. </li></ul><ul><li>manufacturers began to see it as an effective way of regaining control of their supply chain and reducing the power base of the large retailer. </li></ul>
  6. 7. Benefits of VMI <ul><li>Smoother demand. </li></ul><ul><li>Increasing in sales. </li></ul><ul><li>Lower inventories and reduced costs to other industries. </li></ul><ul><li>Planning and ordering cost will decrease due to the responsibility being shifted to the suppliers. </li></ul>
  7. 8. Benefits <ul><li>The overall service level is improved by having the right product at the right time. </li></ul><ul><li>Having the correct item in stock when the end customer needs it, benefits all parties involved. </li></ul><ul><li>React more quickly to market requirements. </li></ul><ul><li>Manage new product better. </li></ul><ul><li>Reducing stock out rate. </li></ul>
  8. 9. Implementation of Vendor Managed Inventory
  9. 10. Implementation of VMI <ul><li>Agreement between </li></ul><ul><li>supplier and retailer </li></ul><ul><li> ( fill rates, frequency of </li></ul><ul><li>replenishment) </li></ul><ul><li>Informing about VMI </li></ul><ul><li>- Employees, inventory and replenishment planners </li></ul><ul><li>- Strategic management team should understand the concept and be ready to accept the concept of inventory management by a third party </li></ul>
  10. 11. Implementation of VMI <ul><li>Data Exchange </li></ul><ul><li>1) A one-time exchange of retailer’s sales history (daily/weekly) </li></ul><ul><li>2) Ongoing product activity data exchange using EDI. </li></ul><ul><li>- EDI refers to the </li></ul><ul><li>computer-to-computer transmission </li></ul><ul><li>of business information between </li></ul><ul><li>trading partners </li></ul><ul><li>- Covering all possible documents exchanged and for all types of products. </li></ul>
  11. 12. Implementation of VMI
  12. 13. Implementation of VMI <ul><li>Ordering </li></ul><ul><li>- the vendor calculates the reorder point </li></ul><ul><li>- The quantity available with retailer is then compared to the calculated reorder quantity level and order quantities are determined </li></ul>
  13. 14. Implementation of VMI <ul><li>The created orders will be communicated to </li></ul><ul><li>the retailer. </li></ul><ul><li>- Finally, the shipment is sent. </li></ul>
  14. 15. Implementation of VMI <ul><li>Invoice Matching </li></ul><ul><li>Measurement </li></ul>
  15. 16. Basic VMI Software
  16. 17. Basic VMI Software <ul><li>1) Homemade </li></ul><ul><li>- Requires expert in the area of VMI, Inventory Management and a few good programmers </li></ul><ul><li>- Reflects the uniqueness of your company. </li></ul>
  17. 18. Basic VMI Software <ul><li>2) Pre-Packaged </li></ul><ul><li>- EDI or Internet based </li></ul><ul><li>- Sometimes it  can be customized to meet your companies specific needs. </li></ul>
  18. 19. Successful example of VMI implementation
  19. 20. <ul><li>Wal-Mart and P&G </li></ul><ul><li>Wal-Mart tired to utilized its capabilities to make more inventory of the most demanded items while reducing the overall inventory. </li></ul><ul><li>Networked its supplier by computers. </li></ul><ul><li>Cooperates with Proctor & Gamble (P&G) for maintaining inventory in stores. </li></ul><ul><li>Built an automated re-order system linking all computers between P&G and its stores and other distribution centers. </li></ul>
  20. 21. <ul><li>Wal-Mart and P&G </li></ul><ul><li>How the collaboration worked </li></ul><ul><li>The computer system at Wal-Mart stores identified an item which was low in stock and sent a signal to P&G. </li></ul><ul><li>the system sent a re-supply order to the nearest P&G factory through a satellite communication system. </li></ul><ul><li>P&G delivered the item either to the Wal-Mart distribution center or directly to the concerned stores. </li></ul>
  21. 22. <ul><li>Wal-Mart and P&G </li></ul><ul><li>Successful proposition for both. </li></ul><ul><li>Wal-Mart could monitor its stock levels in the stores constantly . </li></ul><ul><li>identify the items that were moving fast. </li></ul><ul><li>P&G could also lower its costs. </li></ul>
  22. 23. CASE STUDY
  23. 24. <ul><li>Point Spring & Draft Shaft Company </li></ul><ul><li>PSD is a leading distributor of medium and heavy-duty truck parts. </li></ul><ul><li>In 1997 PSD combined with Brak Drum & Equipment Company to expand their scope of expertise and better service their customers. </li></ul><ul><li>Out of 5,000 truck parts distributor, PSD was recently recognized by truck parts and service magazine as one of the top five distributors in the United States. </li></ul>
  24. 25. <ul><li>The critical component of PSD’s success is to have the right parts available at the right time. </li></ul><ul><li>Point Spring manager, states, “When we don’t have the right parts on-hand, the process of expediting orders drives our costs up and therefore, reduces our margins and potential profit.“ </li></ul>
  25. 26. <ul><li>Why PSD used VMI? </li></ul><ul><li>Using the traditional business systems to manage inventory were sufficient, but they had limitations. </li></ul><ul><li>Critical inventory activities information was not updated frequently enough to maintain a clear picture of fluctuating customer demand. </li></ul><ul><li>“ These systems were slow to react which put us in stock-out situations and forced us to expedite orders at substantial increase in costs, in order to maintain our customer service commitments”. </li></ul>
  26. 27. <ul><li>PSD’s weak working relationship with suppliers affects its ability to satisfy demand of its customer. </li></ul><ul><li>PSD found many of the leading companies were using VMI to gain the benefits that it was looking for. </li></ul><ul><li>research led PSD to Enterprise Data Management and their Datalliance VMI service. </li></ul><ul><li>VMI was applied in PSD to only some product lines. </li></ul>
  27. 28. <ul><li>Results from using VMI </li></ul><ul><li>helped PSD effectively manage inventory. </li></ul><ul><li>the appropriate quantity of a specific part in stock, when the customer needs it. </li></ul><ul><li>Sales in VMI lines increased between 7%-10% with no increase in inventory. </li></ul><ul><li>VMI helped PSD to decrease inventory carrying and expediting cost. </li></ul>
  28. 29. <ul><li>VMI product lines actually increased slightly to 96%. </li></ul><ul><li>VMI benefits the suppliers in making good forecasts and manufacturing plans due to daily basis customer demands available. </li></ul><ul><li>&quot;We absolutely value our suppliers that use VMI, and have set an objective to convert our top 15 suppliers to VMI as soon as possible,&quot; concludes Ryan. </li></ul>
  29. 30. Non successful example of VMI implementation
  30. 31. <ul><li>K-Mart Example </li></ul><ul><li>K-Mart has also cut back its VMI program from more than 300 suppliers down to about 50. </li></ul><ul><li>vendor departments achieve service levels of 99.5% while maintaining inventory levels at more than 70% below objective. </li></ul><ul><li>found most manufacturers did not have adequate forecasting. </li></ul><ul><li>K-Mart's loss of control over the scheduling of shipments was a major factor in trimming the program. </li></ul>
  31. 32. The biggest obstacles to VMI
  32. 33. <ul><li>Two major obstacles to a successful VMI implementation: </li></ul><ul><li>Strategic: the concerns most often expressed at the distributor level. </li></ul><ul><li>Some distributors concerned about letting their private information getting into the hands of their vendors. </li></ul><ul><li>At the strategic level, a high level decision must be made about how the company wants to position itself. </li></ul>
  33. 34. <ul><li>Operational: job functions, processes and performance measurements will all need to change in order to get the most benefit. </li></ul><ul><li>The sources of resistance are many, but the most common is change. </li></ul><ul><li>Other issues that interrupt VMI implementation are regarding the management of change and specific job changes. </li></ul><ul><li>Concerns such as the role of buyers and sales people in the new environment and the new measurement systems must be addressed. </li></ul>
  34. 35. <ul><li>Conclusion </li></ul><ul><li>Although there has been some cases with unsatisfactory results in applying VMI concept, but in general the VMI systems has been highly successful in most experiences. </li></ul><ul><li>On paper, VMI seems simple to implement, but in the real world of personalities and professional relationships, there are many obstacles to climb. </li></ul><ul><li>In short, trust is very important for the VMI model to succeed. </li></ul>
  35. 36. Questions & Answers