Vendor Managed Inventory (VMI)


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Leverage information to remove cost and time from the supply chain, while delivering better service to the end customer

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Vendor Managed Inventory (VMI)

  1. 1. Vendor Managed Inventory (VMI) Leverage information to remove cost and time from the supply chain, while delivering better service to the end customer Anand Subramaniam
  2. 2. <ul><li>“ They are all people who are in trouble about something and want a little enlightenment. I listen to their story, they listen to my comments, and then I pocket my fee .” </li></ul><ul><ul><li>- Sherlock Holmes </li></ul></ul>
  3. 3. Highlights <ul><li>Inventory Management </li></ul><ul><li>Strategic Alliance / Partnership </li></ul><ul><li>VMI – Overview </li></ul><ul><li>VMI – Business Model </li></ul><ul><li>VMI – Types & Benefits </li></ul><ul><li>VMI – Implementation </li></ul>
  4. 4. Inventory Management
  5. 5. Inventory Management Evolution Owner Managed Inventory Direct Selling Consignment Selling Vendor Managed Inventory Continuous Replenishment Time
  6. 6. Annual Inventory Carrying Cost ~ 26% Overall carrying cost 3% (2 - 5%) Pilferage, scrap, and obsolescence 11% (6 - 24%) Investment costs (borrowing costs, taxes, and insurance on inventory) 3% (3 - 5%) Labor cost from extra handling 3% (1 - 3.5%) Material handling costs (equipment, lease or depreciation, power, operating cost) 6% (3 - 10%) Housing costs (building rent, depreciation, operating cost, taxes, insurance) Cost as a % of Inv. Value Category
  7. 7. Strategic Alliance / Partnership
  8. 8. Customer / Manufacturer Partnership Quick Response (QR) Strategies Manufacturer receive POS data from retailers and use this information to synchronise their production and inventory activities with actual sales at the retailer. In this strategy, the retailer still prepares individual orders, but the POS data are used by the supplier to improve forecasting and scheduling and to reduce lead time Vendor Managed Inventory (VMI) Strategies Manufacturer decide on the appropriate inventory levels of each of the products (within previously agreed-upon bounds) and the appropriate inventory policies to maintain these levels Continuous Replenishment (CR) Strategies Manufacturer receive POS data and use these data to prepare shipments at previously agreed-upon intervals to maintain specific levels of inventory
  9. 9. Reasons for Strategic Alliances <ul><li>Shared risk of investment </li></ul><ul><li>Improved use of technology </li></ul><ul><li>Enhanced strategic growth </li></ul><ul><li>Improved top and bottom line </li></ul><ul><li>Enhancing organisational skills / learning </li></ul><ul><li>Improved access to new market / channels </li></ul><ul><li>Improving time to market, repair times and / or distribution </li></ul><ul><li>Lowered system costs and cycle times with efficient and effective use of facilities and resources </li></ul>
  10. 10. VMI - Overview
  11. 11. Vendor Managed Inventory (VMI) <ul><li>Is an integrated approach whereby the inventory at the distributor / retailer / customer ( downstream ) is monitored and managed by the manufacturer / vendor ( upstream ) </li></ul>
  12. 12. VMI - Rationale <ul><li>By pushing the decision making responsibility further up the supply chain, the manufacturer / vendor will be in a better position to support the objectives of the entire integrated supply chain resulting in sustainable competitive advantage </li></ul>
  13. 13. VMI – Why & What VMI Manufacturer has access to the distributors inventory data and is responsible for generating purchase orders Collaborative supply chain initiative Manufacturer is responsible for maintaining the distributors inventory levels Optimising Supply Chain performance Collection & centralisation of inventory data Remote access to collected data Integration of inventory data & business systems
  14. 14. VMI - Goals <ul><li>Cost reduction through process automation and allowing for management by exception </li></ul><ul><li>Improved visibility of supply chain process and inventories consumption rates that ensures production closely matches demand </li></ul><ul><li>Improved product availability and inventory performance through timely information exchange and effective replenishment planning strategies </li></ul>
  15. 15. VMI – Business Model
  16. 16. VMI – Before & After Before VMI M any manufacturers operated stocking programs where a representative visited a customer a few times a month and restocked their supplies to an agreed-upon level After VMI Instead of the customer monitoring its sales and inventory for the purpose of triggering replenishment orders, the manufacturer assumes responsibility for these activities
  17. 17. VMI – Business Model VMI Business Model The manufacturer generates the order, not the customer. VMI does not change the “ownership” of inventory. It remains as it did prior to VMI The manufacturer is responsible for creating and maintaining the inventory plan The manufacturer can view every item that the customer carriers as well as true point of sale data The manufacturer receives electronic data (usually EDI or via the internet) that tells him the customer’s sales and stock levels
  18. 18. VMI – Business Model <ul><li>Customer / vendor collaboration means proactive product management </li></ul><ul><li>Higher customer loyalty; lower costs on both sides </li></ul><ul><li>Outsourced inventory ownership (Walmart model) </li></ul><ul><li>Higher product performance guarantees possible </li></ul>
  19. 19. VMI – Types & Benefits
  20. 20. VMI - Types <ul><li>Inbound </li></ul><ul><li>Management of raw material inventories at your plant, by your manufacturer </li></ul><ul><li>Inventory measurements are often already available in real-time database </li></ul><ul><li>Can generally transfer data via VPN to central server for remote access by vendors </li></ul><ul><li>New sensors installed as required and interfaced to site database or a Remote Monitoring Unit </li></ul><ul><li>Outbound </li></ul><ul><li>Management of product inventories at your customer sites, by your own personnel </li></ul><ul><li>Inventory measurements not usually available </li></ul><ul><li>Sensors collect data ( Remote Monitoring Unit) </li></ul><ul><li>Communication to central ERP system for remote access via dial-up modem, wireless, cellular, etc </li></ul>
  21. 21. VMI – Customer Benefits Customer Reduced working capital Lower product purchase cost Reduced daily management of inventory stocks & orders Assured product supply Fewer distress purchases Lower planning and ordering costs Extended e-business capability Improved customer service levels Reduced demand uncertainty
  22. 22. VMI – Manufacturer Benefits Manufac-turer Automated ERP integration Lower customer service cost Increased customer loyalty Better forecasts and fewer consumer stock-outs Improved cash cycle reduced inventory levels Reduced logistics cost Fewer unprofitable sales New service opportunities Extended e-business capability
  23. 23. VMI – Implementation
  24. 24. VMI – Implementation Challenges Challenges Extensive testing of EDI Handling stock levels - over and / or obsolescence Learning curve User Acceptance Impact of random trade promotions / events Scope, KPI, role & responsibilities Technology capability Planner & buyer - trust relationships Contractual relationship
  25. 25. Performance Measures <ul><li>Establish measures – identify the goal </li></ul><ul><ul><li>Starting number of items vs. potential </li></ul></ul><ul><ul><li>Inventory $ initially vs. potential </li></ul></ul><ul><ul><li>Total inventory $ at start, during, and after </li></ul></ul><ul><ul><li>Respective inventory turns and days of supply </li></ul></ul>
  26. 26. Performance Measures (Contd.) <ul><li>Service </li></ul><ul><ul><li>% shipped on time, % perfect orders </li></ul></ul><ul><ul><li>% back orders, % back orders filled </li></ul></ul><ul><ul><li>Customer satisfaction </li></ul></ul><ul><li>Inventory </li></ul><ul><ul><li>Turns </li></ul></ul><ul><ul><li>Units ordered, produced, shipped, residual </li></ul></ul><ul><ul><li>Number of stock outs and duration </li></ul></ul><ul><li>Financial </li></ul><ul><ul><li>Cost, revenue, gross margin </li></ul></ul>
  27. 27. <ul><li>“ An organisation's ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.” </li></ul><ul><ul><li>- Jack Welch </li></ul></ul>
  28. 28. <ul><li>Good Luck </li></ul><ul><li> </li></ul>