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Vendor Managed Inventory

Vendor Managed Inventory

Aditi Jain
By Aditi Jain
May 13, 2015

Vendor managed inventory is a concept wherein the supplier takes up a major responsibility of maintaining inventory levels for the customer/buyer usually at consumption location. Apart from maintaining the inventory, supplier also performs other roles. Supplier is also responsible for deciding the product mixes and the level of safety stock. The delivery to the customer is made using a third party logistics provider and it is made just in time according to customer’s needs. As the supplier needs to get the information from customer to maintain the inventory, integration of customers and suppliers plays a key role. The EDI software is used for the integration. Suppliers also use statistical methodologies to forecast the demand and plan the inventory. Electronic data interchange format is used to exchange the data. The concept of VMI is mainly used in consumer goods industry.

For its successful implementation both customer and buyer should understand the concept of VMI very well and should be able to foresee its advantages both at an individual and at an organizational level. The benefits for customer are more immediate than the supplier. But in the long run it is beneficial for both the customer and supplier. The metrics such as case fill rate, vehicle fill rate and on shelf availability are shown to improve over a period of time. Retailers or customers benefit from lower inventory, reduced risk and increase in overall service levels.    The supplier’s benefits include better control on display of product. Also their employees would have better customer contact and have direct access to customer’s point of sale (POS) data and thus able to know what is trending in the market. In the traditional supply chain the purchase orders have to be approved before placing any order. But in VMI the suppliers can place replenishment orders without getting purchase order approved. This leads to shorter and thus efficient supply chain. If used appropriately the overall savings as per industry standards can be eight to ten percent.

Various teams need to be aligned for the successful implementation of VMI. The senior management team should see the results and should be ready to implement the solution. The organizational strategy should support the concept of VMI. IT team plays a vital role in the whole process as proper infrastructure should be in place before even implementing the VMI solution.

VMI needs collaboration and mutual trust as there is a shared database where all the information is stored that can be accessed on real time basis. The customers need to provide the information correctly to the supplier so that they are able to forecast the demands and thus optimize the inventory. Also customers need to trust the supplier with their information which is needed for business decision making. If implemented well it can also strengthen the relationship between supplier and the customer.

The concept of VMI seems to be more relevant to larger companies than smaller organizations as they have more resources to leverage. Also the organization should have clear goal in mind for implementing VMI. It should not implement it just because competitors are doing so. There has to be a strategic focus for the implementation of VMI and the organizations should do a judicious choice in implementing this strategy in alignment with the overall Organization Objectives.

References:

http://www.scsinternational.com/blog/portfolio-item/vendor-managed-inventory/

http://consumergoods.edgl.com/white-papers/How-P-G-Does-Vendor-Management-Inventory—A-New-Era-of-Global-Innovation95464

http://help.sap.com/saphelp_46c/helpdata/en/86/37e619f09b11d18ca1080009d10d9a/content.htm

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About the author:

Aditi has done her Masters in Business administration and is currently working at Fractal Analytics as an Analyst in projects related to Vendor Managed Inventory and Transportation and Warehouse for a CPG client.

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