Vendor managed inventories

1. Prerana Velinkar
PGDM (Operations)
Roll no: 180

2. • The supplier is responsible for maintaining the customer’s inventory levels
• VMI involves collaboration between suppliers and their customer (e.g., distributor, retailer, OEM or product
end user)
What is a Vendor Managed Inventory (VMI) ???
A Typical Business Model
The client places an order against the
supplier
The client is in control of the timing and
size of the replenishment order
The client creates and maintains the
inventory plan
The supplier receives electronic data
that shows client’s sales and stock
Supplier can view every item that the
client carriers as well as the sales data
The supplier is responsible for creating
and maintaining the inventory plan
VMI Model
VS
VMI needs:
• Clarity of expectations and
collaboration between 2 parties
• Agreement on how to share the
information
• Keeping the communication
channel open
• Constant real time monitoring
• On-time replenishments
Category Cost as % of inventory value
Housing costs 6% (3% -10%)
Operating costs 3% (1% - 3.5%)
Labour costs 3% (3% - 5%)
Investment costs 11% (6% - 24%)
Pilferage, scrap & obsolescence 3% (2% - 5%)
Overall inventory carrying cost ~ 26%

3. Vendor is on-site Replenishment on visit Renting space next doorAccess to client’s system
• Vendor’s employee is
positioned full time at
customer’s facility
• Used when the customer
has one vendor for 70%-80%
of their supplies
• Physical replenishment of
inventory on vendor’s visit
• The visit could be weekly or
once in 2 weeks
• Current inventory levels are
checked and updated
accordingly
• Vendor has access to client’s
inventory system
• The inventory status is
known in real time
• EDI is triggered when
inventory falls below a fixed
point for replenishment
• Vendor rents space nearby
or inside customer’s
premises
• Similar to ‘vendor on-site’
expect that a space is rented
for inventory
replenishments
VMI execution types:
VMI advantages:
• Reduction or removal of safety stock
• Low inventory levels
• Reduced lead time
• Purchasing cost reduction
• Reduction in uncertainty
• Customer becomes too reliant on a supplier to manage its
inventory
• Customer preferences can change and if your vendor doesn't
supply a wide enough range of products you may be stuck with
items your customers don't want
VMI disadvantages:

4. How does VMI work ???
1
Product Activity Report
2
VMI Software Analysis
4
Inventory replenishment
3
Data review
1. Creation of Product Activity Report
• Supplier receives a Product Activity Report using EDI or the
supplier has an access to customer’s inventory system
• This report contains the demand information, sales volumes,
forecasting data and the inventory levels
2. Analysis of data using software
• Software analyses data and creates recommended
replenishment orders
• Replenishment could be daily or weekly
3. Data review and replenishment order triggered
• Supplier’s planner reviews the recommended replenishment
requirements before triggering replenishments
• This is an approval stage
4. Stock sent to customer’s inventory
• Stock is sent to the customer’s inventory
• Customer’s inventory is replenished
• Inventory level tracking continues

5. Successful supply chain management:
This retail giant:
• stocks products made in more than 70 countries and at any given time
• operates more than 11,000 stores
• in 27 countries around the world and
• manages an average of $32 billion in inventory
• In the 1980s, Walmart began working directly with its manufacturers thus being able to expect close to 100% order fulfilment
• In 1989, Walmart was named ‘Retailer of the Decade’, with distribution costs estimated at a mere 1.7% of its cost of sales while
competitor’s distribution cost was: Kmart (3.5%) and Sears (5%)
Reasons behind effective supply chain:
Strategic Vendor Partnership
• The company established strategic partnerships with their vendor
• Offered them the potential for long-term and high volume purchases in exchange for the lowest possible prices
Cross Docking as Inventory Tactic
• Suppliers deliver products to Walmart’s distribution centers where the product is cross docked and then delivered to Walmart stores
• Goods cross from one loading dock to another, usually in less than 24 hours and company trucks that would otherwise return empty
“back haul” unsold merchandise
Technology
• Its technology and network design allowed Walmart to accurately forecast demand, track and predict inventory levels, create highly
efficient transportation routes, manage customer relationships and service response logistics

6. Walmart’s Secret Sauce:
Vendor’s
location
Walmart
stores
Inventory levels and sales data
Goods delivery (Inventory replenishment)
Data
analysis
Technological backing:
• Retail link- Walmart devised mammoth database
Through a global satellite system, Retail Link essentially gives suppliers
 all of their sale through data by SKU, by hour, by store
 on-hand inventory by SKU
 gross margin achieved and
 inventory turns
• RFID tags- They numerical codes that can be scanned from a distance to
track pallets of merchandise moving along the supply chain. Wal-Mart
encouraged its suppliers to use RFID technology as well
• Smart tags- These are handheld scanner, that allow employees to quickly
learn which items need to be replaced
• Smart phone app- Walmart rolled out SPARC, which stands for Supplier
Portal Allowing Retail Coverage. SPARC is a smartphone app that enables
approved suppliers and their third party firms to keep a check on all stocks
PULL SYSTEM

7. Gross Margin Return On Investment (GMROI)
• GMROI is a measure of inventory productivity
• It allows you to understand
 The velocity with which your inventory is turning and
 The return you are getting on your investment
• The basic formula is:
GMROI = Gross margin/average inventory cost
The average inventory cost includes freight and all related expenses
Gross margin = Total Sales – Cost of Goods Sold
• GMROI helps to determine the profit generating and non-profit generating categories
The GMROS (Gross Margin Return on Stores)
is the calculated as:
GMROS= Gross margin in $ / square foot
allotted to the product
• A product with higher GMROS will
consume relatively less space and earn
more Gross Margin dollars
GMROI allows to restructure the procurement
process to see if making adjustments will
benefit sales
Some of the common adjustments retailers
make from GMROI calculations are:
• Instructing suppliers to ship more or
less frequently
• Reducing inventory in a particular
category
• Considering lowing prices to increase
sales

8. Healthcare Supply Chain Trends:
• Healthcare industry is witnessing sharp rise in price in almost all its products and services
• The alarmingly high pace of upward movement of cost is making the produce of the industry beyond the reach of the mass
• Supply chain in this industry being a significant driver of cost is therefore grabbing all the attention from industry stakeholders
• VMI approach could be used here to rope in supplier for a long term relationship and control costs
Hospital’s stock level
Proposed replenishment
Supplier
Web portal
Hospital
1. Stock level
falls below the
‘reorder point’
2. Replenishment
order request is
triggered
3. Order
review and
PO sent to
the supplier
(ERP system)
4. Sales order
triggered by the
supplier
5. Stock is picked,
packed and
shipped by the
supplier
6. Consignment
is received at the
hospital
7. Inventory is
replenished

9. 4Ps of VMI’s success:
People
• Established cross
functional team
• Aligned executive
commitment
Provider
• Selected VMI
software
• Well established
connectivity
process
• Integrated systems
Process
• Real time data
visibility
• PDCA approach-
Plan, Do, Check,
Act
Partnership
• Win-win partnership
development
• Collaborated
forecasting
• Shared metrics
Some closing words:
Challenges faced by distributors:
• Stocking the right inventory level
• Improving forecast accuracy
• Reducing wastage and obsolescence
• Managing quality
Challenges faced by suppliers:
• Large lead times
• Quality improvement
• Cost reduction
Though VMI is not the ultimate answer, but it is one giant step
in the right direction
VMI can help ensure building of right customer-supplier
relationship, product availability and end user satisfaction
Jointly managed inventory (JMI) is an enhanced version of
vendor-managed inventory (VMI).
The primary difference between JMI and VMI is the
integration of the customer and vendor systems, which gives
each partner direct access to the other’s systems and leads to
mutual data sharing