vendor managed inventory
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Vendor Managed InventoryVendor Managed Inventory (VMI) (VMI)
VMI is essentially an integrated VMI is essentially an integrated approach whereby the inventory approach whereby the inventory
at the distributor/retailer at the distributor/retailer (downstream) is monitored and (downstream) is monitored and managed by the manufacturer managed by the manufacturer
(upstream)(upstream)
VMI rationale ….VMI rationale ….By pushing the decision making By pushing the decision making
responsibility further up the supply responsibility further up the supply chain, the manufacturer/vendor will be chain, the manufacturer/vendor will be
in a better position to support the in a better position to support the objectives of the entire integrated objectives of the entire integrated
supply chain resulting in sustainable supply chain resulting in sustainable competitive advantagecompetitive advantage
VMI includes …VMI includes …• Determining appropriate order
quantities• Managing proper product mixes• Configuring appropriate safety stock
Typical Benefits to Typical Benefits to ManufacturersManufacturers
• Lower inventory investments (raw and finished)
• Better scheduling and planning• Better market information• Closer customer ties and preferred
status
Typical Benefits to RetailersTypical 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 FactorsVMI 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 Electronic Data Interchange EDIInterchange EDI
computer to computer computer to computer exchange of business exchange of business
transaction in a standard transaction in a standard formatformat
EDI Benefits …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 inventoryOwnership 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 Requirements for Effective SP(Strategic Partnering)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 IssuesImportant 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 IssuesImportant 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 ImplementationSteps 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 Examples of SP Successes and Failuresand 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.