Vendor Managed Inventory (VMI)VMI is essentially an integratedapproach whereby the inventory at the distributor/retailer(downstream) is monitored and managed by the manufacturer (upstream)
VMI rationale …. By pushing the decision making responsibility further up the supplychain, the manufacturer/vendor will be in a better position to support the objectives of the entire integrated supply chain resulting in sustainable competitive advantage
VMI includes …• Determining appropriate order quantities• Managing proper product mixes• Configuring appropriate safety stock
Typical Benefits to Manufacturers• Lower inventory investments (raw and finished)• Better scheduling and planning• Better market information• Closer customer ties and preferred status
Typical 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 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 Interchange EDI computer to computer exchange of businesstransaction in a standard format
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 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 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 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 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 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 and 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.