Vendor-Management Inventory: Introduction

1. Vendor-management inventory (VMI) is a family of business models in which the buyer of a product provides certain information to a supplier of that product and the supplier takes full responsibility for maintaining an agreed inventory of the material, usually at the buyer's consumption location (usually a store). 2. Vendor Managed Inventory (VMI) by Park City Group is a great way to manage your relationships with retailers and ensure that your inventory levels are always at optimal levels. 3. Vendor-managed inventory (VMI) lets companies reduce overhead by shifting responsibility for owning, managing, replenishing inventory to vendors. Vendors track goods shipped to distributors and retail outlets, and monitor retail supplies, enabling the vendors to replenish inventories when supplies are low. The practice is common in the retail sector, and is also used in other phases of supply chains. Not only do assets decrease, the amount of working capital needed to operate a business decreases. 4. VMI is a means of optimizing Supply Chain performance in which the manufacturer is responsible for maintaining the distributors inventory levels. The manufacturer has access to the distributors inventory data and is responsible for generating purchase orders. To further define it, lets look at 2 business models: 5. VMI means that third-party logistics provider can also be involved to make sure that the buyer has the required level of inventory by adjusting the demand and supply gaps. 6. VMI helps foster a closer understanding between the supplier and manufacturer by using Electronic Data Interchange formats, EDI software and statistical methodologies to forecast and maintain correct inventory in the supply chain. 7. Vendor Managed Inventory simply means the vendor (the Manufacturer) manages the inventory of the distributor. The manufacturer receives electronic messages, usually via EDI, from the distributor. These messages

tell the manufacturer various bits of information such as what the distributor has sold and what they have currently in inventory. The manufacturer reviews this information and decides when it is appropriate to generate a Purchase Order.

To further explain Vendor Managed Inventory, lets look at an example. Prior to implementing a VMI program, a Widget Distributor operated under a non-VMI business model. It created an inventory plan, then monitored and controlled it's own inventory levels. When the company felt it needed more inventory, they would place a Purchase Order against the manufacturer. However, under a Vendor Managed Inventory setup, the Widget Manufacturer would setup the Distributors inventory plan. The Manufacturer would then monitor the Distributors inventory levels, keeping track of the sales and the current inventory level. Once the Manufacturer believed the Distributors inventory levels were too low, the Manufacturer would generate the Purchase Order and ship the product to the Distributor. Vendor Managed Inventory gives the control over the inventory to the Manufacturer. Thus, Vendor Managed Inventory promotes a strong partnership between the Manufacturer and the Distributor. Vendor Managed Inventory (VMI) is a streamlined approach to inventory management and order fulfillment. VMI involves collaboration between suppliers and their customers (e.g. distributor, retailer, OEM, or product end user) which changes the traditional ordering process.

Vendor Managed Inventory (VMI): How does It Work

The goal of Vendor Managed Inventory is to provide a mutually beneficial relationship where both sides will be able to more smoothly and accurately control the availability In VMI a manufacturer or distributor assumes the role of inventory planning for the customer. Extensive information sharing is required so that the manufacturer/distributor can maintain a high degree of visibility of its goods at the customers location. Instead of the customer reordering when its supply has been exhausted, the supplier is responsible for replenishing and stocking the customer at appropriate levels. Wal-Mart has mastered VMI and is the company against which many other organizations benchmark themselves.

How to make VMI work

1, Clarify expectations.
There needs to be thorough discussion about how the system will benefit both organizations in the long term or one of the parties, particularly the supplier, is prone to disappointment with some of the short-term results. If these items are not addressed the program will likely be terminated quickly with neither side gaining any of the benefits expected from the program. The objective is clear and constant communication between the supplier and customer. When the two parties work in conjunction they can be assured that the planning function, for both sides, will begin to smooth over time. 2. Agree on how to share information. If the supplier and customer can agree to share information vital to restocking in a timely manner, then the odds of a synchronized system will dramatically improve. Proprietary information would not have to be shared between the supplier and customer, but enough information to maintain a steady flow of goods is necessary.

3. Keep communication channels open. When the two parties set out to implement a VMI program, they need to meet and discuss their goals and how they need to proceed in order to realize those goals. Once a VMI program has been activated, each side needs to understand that there are going to be some miscues. These miscues need to be studied as opportunities for learning and then used to avoid repetitive problems in the future. How does the Manufacturer Monitor the Distributors inventory?

One of the ways a Manufacturer can monitor a Distributors inventory is through the use of EDI (Electronic Data Interchange). Below we have listed a few of the EDI sets that may be used. EDI Documents used in VMI

EDI is an integral part of VMI process. Some of the EDI transactions used in VMI are listed below:

#852 - Product Activity - Sent by the Distributor The distributors inventory level and product activity. The standard #852 only transmits a "change" since the previous transmission. An "All Item Refresh" sends every field for every item.

#855

Recommend Advanced Receipt Invoice

Replenishment Ship Advise Notice Sent

Sent Sent

by by by the

the the the

Manufacturer. Manufacturer. Distributor. Manufacturer.

The order the manufacturer has created.

#856/857 #861 #810

Sent out right before the Shipment leaves the Manufacturer.

Sent by

What the Distributor actually Received.

Electronic Billing.

#820 Payment/Remittance Advise - Sent by the Distributor.

How to start up a Vendor Managed Inventory program

There are 2 different ways to start up a VMI program. 1. Homemade System: Some companies decide to build their own software. It requires expert knowledge in the area of VMI, Inventory Management and of course, a few good programmers.

Benefits: The benefit of this type of system is that it can be customized specifically for your business needs. You can build the system to reflect the uniqueness of your company.

Pitfalls: you must have a project group that includes true experts in VMI & Inventory Management. They must have a true understanding of exactly how Vendor Managed Inventory operates. This would include the EDI sets used as well as how to construct a reliable inventory plan. Additionally, you may

encounter issues with your programmers. Once your system is completed, will they be available for future updates or enhancements? In most companies, the project team would have the use of programmers only for a short period. Since most VMI systems need to grow or improve over time, you'll need to have programmers at your disposal on an ongoing basis. Most of the companies I have spoken to that have built their own systems eventually decide to go with a Prepackaged System (see below). 2. PrePackaged: There are a few very good off the shelf VMI packages on the market today. The software usually has most of the needed basic functionality. Usually it can be customized to meet your companies specific needs.

Benefits: Most of these packages meet all of the standard VMI Pitfalls: There may be additional charges for any customization you require. Also, you can probably expect additional charges for periodic systems upgrades.

Unexpected demand changes by the customer need to be shared with the supplier. Changes in demand could result from the customer acquiring a new, large customer opening of a great deal of stores in a short period; or offering special promotions that create spikes in demand. The supplier may be unable to schedule production or shipment in a timely manner, causing a drop in inventory available for the customer to sell in the event of a foreseen increase in demand. A spike in demand could also create a burden on the supplier, who will have to reprioritize its production plan or inventory from one customer to another. Likewise, if the supplier is experiencing a significant spike in demand from a major customer, it may be wise to let the VMI customer, and other customers as well, know that the supplier will have very little flexibility over a certain period of time, so that everyone can adjust accordingly. The most common cause of VMI failure revolves around communication breakdowns. All of these problems in implementing a VMI program can be significantly diminished if they are adequately addressed at the beginning of discussions. Hence, there should be

several

in-depth

meetings

upfront

to

avoid

problems

down

the

road

Developments Jointly Managed Inventory: VMI is a stepping-stone toward an emerging process called Jointly Managed Inventory. In Jointly Managed Inventory a partnership between the supplier and customer is formed. This solidifies the current VMI relationship. Jointly Managed Inventory (JMI) is a much more detailed extension of VMI but the goals and premise are quite similar. It takes the foundation from which the relationship has already been built and fine-tunes it. This partnership involves increased tactical planning between the supplier and customer when developing JMI. This should include, but is not limited to, the customer integrating the supplier into the customers This integration allows the supplier to gain insight into real-time sales data to further improve the replenishing function while being able to better plan its own production/distribution system to meet the customers needs. Proceeding to this step will further solidify the relationship and produce a favorable outcome for each party.

Goals and Objectives:

Instead of sending purchase orders, customers electronically send daily demand information to the supplier The supplier generates replenishment orders for the customer based on this demand information.: Improved Inventory Turns Improved Service Increased Sales The Vendor Managed Inventory (VMI) is essentially Electronic Data Interchange (EDI) where the retailer has given their vendor access rights to their point-of-sale (POS) system. VMI makes it less likely that a business will unintentionally become out of stock of a good and reduces inventory in the supply chain. vendor (supplier) representatives in a store benefit the vendor by ensuring the product is properly displayed and store staffs are familiar with the features of the product line, all the while helping to clean and organize their product lines for the store. VMI work is shared risk.. A special form of this commission business is scan-based trading whereas VMI is usually applied but not mandatory to be used. vendors benefit from more control of displays and more contact to impart knowledge on employees; retailers benefit from reduced risk better store staff knowledge (which builds brand loyalty for both the vendor and the retailer), and reduced display maintenance outlays Manage and maintain forecasts Analyze or handle forecasts or inventory exceptions Maintain forecasts and inventory parameters set by trading partners Interface with trading partners regarding new products and promotions

 Prepare various performance reports and respond to problems in real time Perform timely order maintenance . When a distributor needs product, they place an order against a manufacturer. The distributor is in total control of the timing and size of the order being placed. The distributor maintains the inventory plan. The manufacturer receives electronic data (usually via EDI or the internet) that tells him the distributors sales and stock levels. The manufacturer can view every item that the distributor carriers as well as true point of sale data. The manufacturer is responsible for creating and maintaining the inventory plan. Under VMI, the manufacturer generates the order*, not the distributor. VMI does not change the "ownership" of inventory. It remains as it did prior to VMI. When the supplier places inventory at a customers location and retains ownership of the inventory. Payment is not made until the item is actually sold. A VMI relationship may or may not involve consignment inventory.

RESEARCH METHODOLOGY
RESEARCH
Research is a process in which the researchers wish to find out the end result for a given problem and thus the solution helps in future course of action. The research has been defined as A careful investigation or enquiry especially through search for new facts in branch of knowledge

RESEARCH DESIGN
The research design used in this project is Analytical in nature the procedure using, which researcher has to use facts or information already available, and analyze these to make a critical evaluation of the performance.

DATA COLLECTION:
There are two types of sources for data collection:

Primary sources: primary sources are the sources which are collected for the first
time. No primary data is used in this study.

Secondary Sources: secondary sources are the sources based on the data have been
done earlier. 1. 2. 3. The data are collected from the annual reports Data are collected from the websites. Books and journals pertaining to the topic.

TOOLS USED IN THE ANALYSIS

Economic Order Quantity. Safety Stock. ABC Analysis. FSN Analysis. Linear Regression method. Inventory turnover ratios.

ECONOMIC ORDER QUANTITY: MEANING

A decision about how much to order has great significance in inventory management. The quantity to be purchased should neither be small nor big because costs of buying and carrying materials are very high. Economic order quantity is the size of the lot to be purchased which is economically viable. This is the quantity of materials which can be purchased at minimum costs. Generally economic order quantity is the point at which inventory carrying costs are equal to order costs. In determining economic order quantity it is assumed that cost of managing inventory is made up solely of two parts i.e., ordering cost and carrying cost. The cost relationships are shown in below figure.

FORMULA FOR CALCULATING ECONOMIC ORDER QUANTITY (EOQ)

SAFETY STOCK:
MEANING
The economic order quantity formula is developed based on assumption that the demand is known and certain and that the lead time is constant and does not vary. In actual practical situations, there is an uncertainty with respect to the both demand as well as lead time. The total forecasted demand may be more or less than actual demand and the lead time may vary from estimated time. In order to minimize the effect of uncertainty due to demand and the lead time, a firm maintains safety stock, reserve stocks or buffer stocks. The safety stock is defined as the additional stock of material to be maintained in order to meet the unanticipated increase in demand arising out of uncontrollable factors. In simple it is tells about which is used to protect against uncertainties.

Because it is difficult to predict the exact amount of safety stock to be maintained, by using statistical methods and simulation, it is possible to determine the level of safety stock to be maintained.

DETERMINATION OF SAFETY STOCK

If the level of safety stock is maintained is high, it locks up the capital and there is a possibility of risk of obsolescence. On the other hand, if it is low, there is a risk of stock out because of which there may be stoppage of production. When the variation in lead time is predominant, the safety stock can be computed as: Safety Stock = (Maximum Lead time- Normal Lead time) * Demand

SAFETY STOCK

The service level of inventory thus depends upon the level safety stocks. Large the safety stocks, there is a lesser risk of stock out and, hence, higher service level. Sometimes higher service levels are not desirable as they result in increase in costs, thus, fixing up a safety stock level is critical. Using past date regarding the demand and lead time data, reliability of suppliers and service level desired by management, safety stock can be determined with accuracy.

ABC ANALYSIS:
MEANING
The inventory of an organization generally consists of thousands of items with varying prices, usage rate and lead time. It is neither desirable nor possible to pay equal attention of all items. ABC analysis is a basic analytical tool which enables management to concentrate its efforts where results will be greater. The concept applied to inventory is called as ABC analysis. Statistics reveal that just a few items account for bulk of the annual consumption of the materials. These few items are called A class items which hold the key to business. The other items known as B & C which are numerous in number but their contribution is less significant. ABC analysis thus tends to segregate the items into three categories A, B & C on the basis of their values. The categorization is made to pay right attention and control demanded by items.

FEATURES OF ABC ANALYSIS

A Class (High Value) B Class (Moderate Value) 1. Tight control on Moderate control stock levels 2. Low safety stock 3. Ordered frequently stores 5. Weekly reports 6. Continuous effort to Moderate efforts reduce lead time Minimum efforts control Monthly control Quarterly control Medium Less frequently Large Bulk ordering Collective posting C Class (Low Value) Less control

4. Individual posting in Individual

ADVANTAGES
This approach helps the manager to exercise selective control & focus his attention only on a few items. By exercising strict control on A class items, the materials manager is able to show the results within a short period of time. It results in reducer clerical costs, saves time and effort and results in better planning and control and increased inventory turnover. ABC analysis, thus, tries to focus and direct the effort based on the merit of the items and, thus, becomes an effective management control tool.

FSN ANALYSIS:
All the items in the inventory are not required at the same frequency. Some are required regularly, some occasionally and some very rarely. FSN analysis classifies items into fast moving, slow moving, and non moving items

Vendor Managed Inventory (VMI) process:

The basic Vendor Managed Inventory (VMI) process can be described in terms of the following two steps: data communications and calculations, monitoring and reporting. (A) Data Communications and Calculations The VMI process starts with the customer sending a Product Activity Report. This report contains demand information such as sales and transfers, along with inventory position information such as on-hand, on-order and in-transit for the items that changed since the last report. The VMI software analyzes the data and creates recommended replenishment orders . The recommendations are based on algorithms which use factors such as forecasts, frequency of sale, and dollar velocity of sales. Ideally, these processes include:
o

Periodic (e.g. weekly) review and calculation of order points and order quantities based on movement data and special information such as promotions, seasonality, etc. Frequent (e.g. daily) comparison of on-hand inventory to order point and generation of recommended replenishment orders

The supplier's planner reviews the recommended orders and any exception conditions before approving appropriate orders. The VMI system then sends:
o o

A Purchase Order to the supplier A Purchase Order Acknowledgment to the customer

(B)Monitoring and Reporting When trading partners begin VMI, they start by agreeing upon objectives for:
o o o

Inventory turns Fill rates (in-stock percentages) Transaction costs

The system monitors actual activity with measurements against those objectives. The system must report the same information to both the supplier and the customer so that the process is highly transparent. Information should always be available to both parties ondemand. Ideally, the VMI system should also provide exception alerts to both parties when measurements get outside an acceptable range or when a problem with the data appears.

VMI Processes in EDI based system

In EDI based system, a series of steps are required to complete the VMI process. Each Step in this process is extremely important. Skipping or not completing any steps will have a major impact on the success of your VMI program. Step1- Senior Sponsorship: Since the business paradigm is changing, senior management must make a firm commitment to this new process. VMI must have senior management sponsorship. It should be identified as a strategic objective and then communicated throughout the organization. Senior management must commit to the: costs involved, manpower needed for setup/maintenance and also the concept of having someone else manage their inventory. Step2-Employee Acceptance: Get all employees to buy into the concept, especially the person currently responsible for maintaining the inventory levels. Without their acceptance, your program will never work. They must understand that VMI will not push them out of a job. It will free up some of their time to allow them to be more productive in other areas. Employee should be given a complete overview of what VMI will mean to the company and the reasons why its being done.

Step3-Synchronize Files: Synchronize the Distributors Product Files with the Manufacturers. This step alone is one of the greatest benefits you will receive from VMI. Synchronizing means that you must match the manufacturers product data with the distributors product data. Are there old, obsolete items on the file? Are the correct product numbers being used? Have new product numbers been properly communicated to the distributor? Any time there is a change to the product catalog, the manufacturer must share the data with their VMI partners. Your initial data synchronization is extremely important as well as the ongoing synchronization that will be needed. Step4- EDI Testing: Extensive testing of all EDI sets to be used. The manufacturer and distributor must work very closely together to validate that the data is being properly sent/received. For example: Does the Quantity on Hand that is being received by the manufacturer match the Quantity on Hand in Distributors stock? Is Quantity Sold being properly sent? You should check a variety of items in different categories (A,B,C). EDI testing many take many tries and adjustments before it is finally correct. Step5- Acceptance & Measurements: The Distributor must understand and agree with the Stocking Plan the Manufacturer is creating. Even though the exact method may be a proprietary method, the distributor should still have an understanding of how the plan is calculated. This will help avoid the future question "Why did they send us this product if we don't need it?" Additionally, predetermined Inventory Turns, Fill Rates and Service Levels should be targeted. The Distributor should monitor their current performance for comparison to later results. Both parties must agree upon the frequency of replenishment (daily? once/twice per week?). The Distributor should have at least one years worth of measurements prior to VMI for comparison to later results.

Step6- POS History: The Distributor sends the Manufacturer his POS (Point of Sale) History file, usually 1-2 years (Disk or Email). This will allow the manufacturer to base the inventory plan on direct sale data rather than data from the distributors past ordering history. The format of the file must be compatible to the needs of the manufacturer. Then the Distributor sends an EDI #852 All Item Refresh. This tells the status and stock level of every item they have. MAKE SURE YOU VERIFY BOTH SETS OF DATA!!! This is your last and most important validation point. Note: The standard #852 only sends those products that had a change in position since the last transmission (if no activity took place for that item, then the item isn't sent). An #852 All Item Refresh sends every item. Step7Distributor makes a sale and enters that transaction into their computer. Step8On a daily/weekly basis the Distributor sends an #852 Product Activity. This reports a change in position on any item since the last #852. Step9The Manufacturer receives the #852 and updates the Distributors Stock Plan .Once antemor Items have hit their Reorder Point (ROP), the Manufacturer creates an Order. Step10The Manufacturer sends out a #855 Purchase Order Acknowledgment to the Distributor. This lets the distributor update their system with the newly created PO. During the beginning of stages of your VMI partnership, it is important to have the Distributor review the #855 and point out any problems.

Step11The Manufacturer picks and ships the order and transmits a #857 Advance Ship Notice. This tells the distributor exactly what is being sent and when its shipping. Step12When the shipment is received, the Distributor transmits a #861 Receipt Advice. This tells the manufacturer exactly what was received. The manufacturer can then match this to his Purchase Order to determine any potential problems (misshipped etc) Step13- (optional)The Invoice is sent out via an #810. Payment by a #820...

Vendor Managed Inventory (VMI): Benefits

VMI can have a number of benefits, including lowered investment in the supply chain (due to better forecasting), JIT delivery and less overstocking) and greater inventory turnover. Its primary benefit, however, is improved customer service due to fewer stockouts and more optimal product mixes. Manufacturers and retailers also stand to benefit from VMI, as it allows them to schedule production and transportation more efficiently (including ordering raw materials), to observe end-user consumption and general market trends more closely, and to develop closer ties with their customers. In summary, Vendor Managed Inventory (VMI) has consistently provided significant and numerous benefits to the Manufacturer, Retailer, Distributor, supplier and customer. Manufacturers Benefits

Visibility to the Distributors Point of Sale data makes forecasting for the manufacturer easier. Promotions can be more easily incorporated into the inventory plan. A reduction in Distributor returns due to improved ordering. Visibility to Stock Levels helps to identify priorities - replenishing for stock or a stockout. Before Vendor Managed Inventory, a manufacturer has no visibility to the quantity and the products that are ordered. With VMI, the manufacturer can see the potential need for an item before the item is ordered.

Retailer Benefits Reduced inventory: This is the most obvious benefit of VMI. Using the VMI process, the retailer is able to control the lead-time component of order point better than a customer with thousands of suppliers they have to deal with. Additionally, the retailer takes on a greater responsibility to have the product available when needed, thereby lowering the need for safety stock. Also, the retailer reviews the information on a more frequent basis, lowering the safety stock component. These factors contribute to significantly lower inventories.

Reduced stock-outs: The retailer keeps track of inventory movement and takes over responsibility of product availability resulting in a reduction of stock outs, there-by increasing end-customer satisfaction. Reduced forecasting and purchasing activities: As the retailer does the forecasting and creating orders based on the demand information sent by the retailer, the retailer can reduce the costs on forecasting and purchasing activities. Increase in sales: Due to less stock out situations, customers will find the right product at right time. Customers will come to the store again and again, there-by reflecting an increase in sales. Distributors benefits:

The goal is to have an improvement in Fill Rates from the manufacturer and to the end customer. Also, a decrease in stockouts and a decrease in overall inventory levels.

Planning and ordering cost will decrease due to the responsibility being shifted to the Manufacturer. The overall service level is improved by having the right product at the right time. The manufacturer is more focused than ever in providing great service to the distributor and the end customer.

Suppliers Benefits: For the supplier, VMI results in increased profitability due to:

Increased sales Reduced operating costs Stronger customer relationships Improved visibility results in better forecasting: Without the VMI process, suppliers do not exactly know how their customers are going to place orders. To satisfy the demand, suppliers usually have to maintain large amounts of safety stocks. With the VMI process, the retailer sends the POS data directly to the vendor, which improves the visibility and results in better forecasting.

Reduces PO errors and potential returns: As the supplier forecasts and creates the orders, mistakes, which could otherwise lead to a return, will come down. Improvement in SLA: Vendor can see the potential need for the item before it is actually ordered and right product is supplied to retailer at right time improving service level agreements between retailer and supplier.

Encourages supply chain cooperation: Partnerships and collaborations are formed that smooth the supply chain pipeline. As long as the supplier carries out its task of maintaining predetermined inventory and avoiding stockouts, it will be able to lock in a VMI-supported customer for the long term with or without a contract. This will produce a steady and predictable flow of income for the supplier and reduce the risk that the customer will switch suppliers (Switching would be too costly for the customer). A VMI arrangement will allow the supplier to schedule its operations more productively because it is now monitoring its customers inventory on a regular basis. Furthermore, reductions in inventory will be achieved once the supplier develops a better understanding of how the customer uses its goods over the course of a year.

Customers Benefits For the customer, VMI results in increased profitability due to:
o o o o

Reduced inventory/increased turns Reduced administrative costs Fewer stock-outs or shortages Increased sales (for distributors and retailers)

When the supplier can see that its customer is about to exhaust its inventory, the supplier can better prepare to replenish the customer because the supplier can then better schedule its own production/distribution. Customers will reduce/eliminate stockouts because they will not have to reorder goods at the last minute without knowing whether the supplier has the ability to restock without interrupting the

customers operations. Therefore, part of VMIs goal is to reduce uncertainty that arises when the supplier is blind to the customers inventory status.

Typical Benefits to Manufacturer/ Supplier Lower inventory investment (raw and

Typical Benefits to Distributor /Retailer Fewer stock-outs with higher turnover

finished) Better scheduling and planning Better market information Closer customer ties and preferred status

Better market information More optimal product mixes Less inventory in channel (transfer costs) Lower administrative replenishment costs

DUAL BENEFITS TO SUPPLIER AND CUSTOMER:

Data entry errors are greatly reduced due to computer to computer communications. The speed of the processing is also improved. Both parties are interested in giving better service levels to the end customer. Having the correct item in stock when the end customer needs it, benefits all parties involved.

A true partnership is formed between the Manufacturer and the Distributor. They work closer together and strengthen their ties. This benefits of a stronger partnership goes beyond VMI.

Stabilize the timing of Purchase Orders - PO's are now generated on a predefined basis. Example: A once/twice Weekly purchase order cycle.

Vendor Collaboration: Other Benefits

Inefficiencies in the supply chain affect not only the retailer, but also the vendors that supply the goods offered to consumers. Inaccurate or inaccessible data in the inventory management system can lead to retailers ordering unnecessary products because they don't know they have supply on hand or hinder a retailer from placing necessary orders

when supplies are low. Leading retailers use business intelligence to collaborate with their vendors to:

Reduce or eliminate the "bullwhip effect." The bullwhip effect is the distortion of product demand signals generated by order batching, shortage planning and reactions to price variations across the supply chain. Although retailers may open access for vendors to monitor aggregated sales data on their products, vendors typically lack visibility into fine-grained transaction-level demand at retail stores. Providing vendors with insight into true demand reduces the necessary volume of safety stock kept on hand.

Leverage economies of scale. Demand for product lines with constant variability such as fashion items is inherently difficult to predict. By combining business intelligence-based sales analysis with postponement (also known as delayed differentiation), the vendor can stock undifferentiated product in bulk and delay specific labor to convert it into its final form until a dependable demand forecast is available.

Make vendors responsible for managing inventory. Web-based BI applications can allow selected external suppliers to access timely detailed demand information for their products across all locations and channels, allowing vendors to more accurately predict customer demand. Additionally, by providing aggregated information pertaining to their competitors' performance, retailers can foster competition between suppliers to proactively maintain shelf stock, virtually eliminating costly out-of-stock and overstock situations.

BI-based vendor managed inventory systems (VMI) co-opt vendors into taking responsibility for properly managing inventory levels at distribution centers and stores, resulting in exponential value for both the retailer and vendors alike.

Supply Chain Efficiency

Business intelligence gives retailers the ability to gain access to enterprise-wide information on the company's supply chain operations. This insight can help to improve the accuracy of demand forecasts and increase the efficiency of the supply chain,

reducing lead times, carrying costs, and operating costs across the enterprise. Retailers can use BI to gain visibility within their supply chain by:

Scrutinizing detailed waypoint logs. Long order picking times may indicate equipment maintenance problems or suboptimal routing. High error rates in orders picked by a given operator can be symptomatic of insufficient training, excessive distraction or defective identification mechanisms. Lessening the amount of time spent locating specific items to fill orders can help to reduce operating costs, increase productivity and optimize service levels.

Analyzing vendor and distribution center lead time and lead time variability. Retailers can reduce the need for safety stock if they can identify bottlenecks in their delivery system and reduce lead times for movement to the sales floor.

Measuring forecast accuracy. Retailers that more quickly identify products with forecasts that vary significantly from actual demand can reduce the possibility that that product will experience an over-stock or out-of-stock position.

The aggregated effect of using business intelligence for supply chain optimization is a reduced need for safety stock to avoid service interruptions, increased asset liquidity, and easier access to available working capital.

Markdown Optimization
Business intelligence can be instrumental in both quickly identifying products that should be discontinued or marked down and determining the most profitable way to sell through poor performing merchandise. Combining item level plans with sales data allows retailers to quickly identify items to be promoted, marked down, or sent to outlet stores. The ability to react promptly to issues at item level enables retailers to avoid build-ups of nonproductive merchandise. In addition, business intelligence can be used to determine the most efficient ways to sellthrough slow selling inventory. Retailers can use BI to identify the levels of discounts that have worked in the past to liquidate similar merchandise. Alternatively, BI can also be used to identify which locations have sold the product better or which sell markdown

merchandise better so that broken assortments can be consolidated to the locations that have the best opportunity to sell the merchandise more quickly or at a higher price. Retailers who take advantage of business intelligence to improve markdown optimization are able to spend less time determining merchandise to mark down and instead are focusing their efforts and investments on more productive inventory.

The Benefits of Business Intelligence for Inventory Improvement

World-class business intelligence environments allow retailers to increase their visibility into inventory management without hampering daily operations. By extracting information from disparate source systems into a centralized repository such as an enterprise data warehouse, retailers are concurrently reporting on metrics related to their supply chain, sales, production and internal operations to make better, fact-based business decisions. By utilizing a data warehouse that supports trending on both historical and future operational metrics such as weeks of supply, sell-through, inventory turnover, gross margin return on inventory and shrinkage, retailers can improve data quality and accuracy, manage inventory levels to avoid lost sales or oversupply, provide external vendors with increased visibility into product performance, and allow managers and executives to make more timely decisions using a common set of data trusted across the entire user community

Factors responsible for a successful VMI System

Although the basic concept of VMI is straightforward, successful deployment is not necessarily easy. There are several keys to success: Recognize that VMI is not for everyone First, companies should recognize that VMI is not for everyone:

Suppliers and customers should only consider VMI for trading partners that are important to them (e.g. reasonably high volume or growth potential) Suppliers and customers can only do VMI with trading partners that have reasonably solid basic operational capabilities (i.e. consistent warehouse procedures and the ability to provide good data)

Understand That VMI is Collaborative Second, VMI is different from a typical in-house information system or business process improvement effort in that neither the supplier nor the customer can do it alone - they must work together to make it happen.
o

Both companies must have mutual trust, a fundamentally good working relationship, and an environment that fosters collaboration.

Don't Underestimate the Importance of the VMI Operations Platform Third, VMI requires a technology and operations platform that is:
o

Designed around a deep understanding of inventory and supply chain management

o o

More than just performing the right calculations. Designed with a solid understanding of issues like varying demand patterns, different supply chain structures (e.g. hub & spoke vs. direct store delivery), multi-location shipping & delivery, and many others.

Built to facilitate consistent, effective communication between the customer and supplier

Provides common information to both parties so the process is transparent (e.g. inventory turns and in-stock percentages)

Provides valid information so people will trust it (e.g. built-in processes to ensure data quality) Exception-oriented so people can focus their efforts where action is needed instead of wading through data (e.g.: highlight unusual demand, suggested transfers, and items not sold)

o o

Managed to ensure reliable operation day-in and day-out. A data center with high availability using techniques such as redundancy, fail-over, 24x7 management Communications management that monitors for expected transmissions, automates re-tries, and alerts when down Skilled people ready to quickly resolve problems (e.g. transmission, data format)

Leverage VMI Experience

Finally, trading partners committed to the success of VMI should look for a source of experienced guidance and support, along with well-conceived implementation tools and processes.
o o o o

People who have implemented VMI and use it regularly Project plans and tools that take the guesswork out of start-up Organizations committed to continually improving the process Professionals ready to provide support when things change, and help whenever it is needed

Six Steps to a Successful VMI System

now the question arises: how can one implement a successful VMI system? There are the following suggestions: 1 COMMUNICATE expectations of all parties. Customers and suppliers must make the effort to sit down and discuss the goals and objectives of implementing VMI. The importance of this step cannot be overstated. Both parties hardware and software requirements must be identified, and an understanding must be reached in terms of how both companies systems will communicate. Then a plan for implementation must be mapped, specifically identifying each partys financial and other responsibilities. 2 Customer must commit to sharing PRECISE information. Suppliers must have visibility into the customers internal sales and inventory information. Without accurate data, ability to quickly meet demand will be impaired. 3 Suppliers must ensure RELIABLE transmission, receipt, and use of information. To facilitate step 2, the supplier must be able to guarantee that the customers trusted information will be communicated, received, and utilized securely and thoroughly to meet the designated needs. Time should be spent during the planning phase discussing information precision and reliability. 4 Sufficiently TEST systems before going live. As with any new system, testing will uncover any bugs or inefficiencies and can help to avoid future headaches. 5 Expect implementation to be a PROCESS not a project. Remember that there is no on/off switch. Adjustments will have to be made as demand levels fluctuate, and no system will be perfect 100% of the time. 6 Plan to spend sufficient TIME AND MONEY to make it work. Most successful VMI systems weve read about took 2-2.5 years to put into operation, and cost hundreds of thousands of dollars for IT and training. Spending (or finding) the time to create a comprehensive system can be a challenge.

Here are two compelling success stories about companies who have recently gone public with their VMI successes. 1. ST Microelectronics N.V. and Hewlett Packard began using their well-planned VMI system in the summer of 2001. Gilles Sanchez, STs supply chain concept owner, said his company has cut product lead time in half, reduced buffer inventory from five to two weeks, and eliminated 80% of manual transactions" (3). Although the returns are terrific, it must be noted that HP and ST worked together for two years to make the system succeed. They say their secret to success was their ability to connect their incumbent IT infrastructures and build off of the existing platform.

2. Sun Microsystems has also figured out how to make VMI successful, but also spent two years in the planning phase. Half of its $350 million fiscal year inventory reduction is a direct result of the new VMI system (the other half, they say, is due to last years general drop in demand). Sun created a pull system with its suppliers. When a customer places an order, a signal is sent to suppliers who are expected to deliver replacement raw materials within four hours, or finished goods within 24 hours. Sun provides suppliers weekly materials, six-quarter forecasts, and month-out views of actual PO data. Their key to success was spending enough time planning with suppliers before moving to the implementation phase.

Controls:
The following are a list of potential controls that could be implemented to monitor VMI systems: 1. At least at first and then periodically thereafter, the retailer should monitor inventory levels to determine whether the vendor is sending enough inventory to prevent stock outs but not too much inventory that is slow to sell. 2. Analyze inventory costs. If VMI is working, then overall inventory costs should decline. 3. Intrusion detection systems to determine if the vendor has compromised the security of the retailers system. 4. Unauthorized access attempts to non-VMI related areas of the retailers system.

VMI'S POTENTIAL PROBLEMS

Successful VMI programs depend on several critical factors, some of which are not immediately obvious. This has led to much confusion in the distribution and retail industries, as suppliers and buyers have sought to implement VMI as the newest improvement to their existing systems. VMI, while a logical outgrowth of EDI, Efficient Consumer Response (ECR), Category Management (CM) and other programs, is qualitatively different. VMI depends upon the availability of solid and comprehensive consumer data (POS). Without such "live" information, the benefits of VMI begin to become elusive. The mfg/vend must understand the true nature of POS data and how the dist/ret is using the stock that is ordered. While previously it was sufficient to know that X number of units were ordered, under VMI, the supplier needs to know whether those units were being inventoried (and for how long), whether they were special orders, if they were ordered just to create full truck loads, the number of end users the units were going to, and so on. Moreover, efficient inventory management and production scheduling requires close

communication regarding promotions, seasonal variation, and new product introductions and selling incentives that may impact the ability to forecast accurately. Thus, exceptions communication must also be incorporated beyond the automated nature of data transfer under VMI. Close supply chain communication is typically best addressed through routine and ad-hoc conference calls, video conferencing, and email systems.

Problems with VMI

What makes VMI different from EDI and its other incarnations is that it passes control of the supply chain as far up the supply chain as possible to support production pooling and inventory minimization. Thus, VMI should only be implemented in cases where the mfg/vend can forecast demand more accurately than the dist/ret. As pointed out earlier, however, the competency to forecast and determine order levels is a learned capability. This indicates that supply chain partners should decide strategically who should hold such responsibility, and then let that entity develop the competency. Making inaccurate decisions in this area can lead to more problems. As well, change must become quickly adopted as "tweaking" will become the norm not the exception. Clearly, there are industries where the vagaries of consumer demand, local conditions or market size dictate that the dist/ret should retain control of inventory management. This was the case with K-Mart, which after reducing the number of vendors it worked with and implementing VMI, discovered that its own buyers could do a better job of forecasting consumer demand in certain circumstances. Some market conditions do not make VMI the best solution and a tailored/hybrid approaches need to be explored. Specifically, the "silver bullet" approach will lead to problems if organizations accept VMI as an end-all solution. One question that could not be resolved in reviewing the activities of many VMI programs is for what type of products VMI will and will not work. This is a complex question where high volume, high turn items, like disposable diapers, are popular candidates because they are low hanging fruit, while "best of breed" organizations have had success in other product types. Wal-Mart and P&G have had a VMI program together for over ten years to manage the inventory and production of disposable diapers,

with great success: turns doubled, Wal-Marts' operating costs fell, and P&G's market share grew (because Wal-Mart gave it preferred shelf space). However, the opinion that non-volatile, low-turn products would also benefit was also expressed, and none of the reported failures revolved around the type of product included in the programs. This may indicate an appropriate starting point to chose mfg/vends that have capabilities but also that produce such products. Additionally, the answer depends on a number of variables that need to be considered, including:

What percent of their total volume do the VMI vendors sell through the dist/ret? What capabilities do the vendors have in the area of forecasting or retail inventory management? How flexible will the system be in the event of required changes and modifications? Will there be minimum volume or exclusivity requirements? What product items are being considered?

Another, more fundamental, problem with making vendors responsible for retailers' inventories is the fact that mfg/vends traditionally want to push product (i.e., maximize inventory), while retailers want to minimize inventory (i.e., optimize sales). Overcoming this dichotomy requires trust that both parties are seeking long term profitability. The dist/ret should also assure itself that the interests of the mfg/vend salespeople are aligned with its own. Elements that need to be considered include:

How will the mfg/vends' salespeople be compensated? How will special pricing and promotions be handled? How will the benefits of VMI be split? What dist/ret sales and volume data should be kept confidential? What are the mfg/vends' other channels?

As distribution systems become more sophisticated, the mechanical aspects of providing outstanding service--whether its next day delivery or access to a broad network of manufacturers--will become more accessible to all firms. Service, therefore, from a distribution aspect, may not translate into a sustainable competitive advantage, however knowing which products, in what quantities, and where to store them, may be.

OUTLOOK AND FUTURE OF VMI

Logistics experts have recently published the results of the annual logistics survey that shows the acceleration of trends towards cycle time compression, reduced inventory, increased inventory velocity and greater use of EDI. According to these researchers, more industries are paying closer attention to supply chain management. The survey results show that information technology and supply-chain management will most affect the future growth and development of logistics. The results of the survey forecast an increase in inventory turns, which survey respondents said will rise from 30% to 40% by the year 2000. They also show that pooling of shipments is re-emerging as a Logistics strategy (14.2% - '94, 17.8% - '96 and 27.5% -2000). This implies that companies are becoming increasingly competitive in determining what inventory to carry while offering quicker and more customized service. According to LaLonde, this can be attributed directly to the application of VMI, which will increase from 4% of inbound shipments'. in '94 to 19% by the year 2000. According to another survey released by the International Mass Retail Association (IMRA), VMI programs will grow substantially in the near future.1 Over 60% of hard goods and almost 40% of soft goods are now under replenishment programs managed by retailers. The survey projects very little growth beyond these levels. On the other hand, respondents mentioned that VMI programs are intended to grow within their organizations from insignificant levels today to 10% of volume in the next three years for hard goods and about 7% for soft goods.

CONCLUSIONS
From above we conclude that: some companies continue to manufacture to stock without leveraging customerspecific data effectively for production planning In order to provide priority service to VMI partners, some vendors reserve inventory resulting in shortages to other customers Insufficient level of system integration results in incomplete visibility High expectations from retailers Resistance from sales forces due to concerns of losing control, effecting sales based incentive programs Lack of trust and skepticism from employees Lower cost retailers are able to essentially outsource their inventory management to their vendors. Potentially reduced lost sales provided that the vendors are able to meet product demand. More accurate forecasts since vendors have more data from the retailers, they are able to more accurately forecast and meet demand for their products. Cost the retailers and vendors must expend the resources necessary to acquire the technology and incur the costs of changing the organization to a VMI arrangement. Security The vendors have significant access to retailer data. The retailer puts one of their most valuable assets, their sales data, in the hands of their vendors. Such access opens the door to a myriad of data and system security issues such as data alteration and deletion, unauthorized access to non-sales related data, inadvertent loss of data or even corporate espionage. Over supply the vendor could ship more inventory than the retailer needs to meet demand.

SUGESSTIONS
Effective implementation of VMI depends on smoothly overcoming the limitations and addressing the concerns of various stake holders. Some of the concerns can be addressed as explained below: Redefine incentive programs based on partnership building instead of sales volume Build strong partnerships with management commitment to effective communication, active sharing of information, commitments to problem solving and continued support Conduct simulations and pilots before actual implementation Organize training sessions before launching VMI program Set reasonable targets for benefits of VMI Establish agreements on service levels and process to handle exceptions

Appendix A VENDOR MANAGED INVENTORY AGREEMENT (A draft of agreement signed for VMI between two parties) This Agreement is entered into on ________________ 2011 between (Name of the company with address) and, a _____________________________ Corporation with offices at ______________________________________ (Buyer). 1. Scope. Buyers orders and purchases from (Name of the company) are governed by (Name of the company) Terms and Conditions, which appear on (Name of the company) quotations, packing slips, invoices and at website: _________________, (Name of the company)Terms and Conditions are incorporated into and form a part of this Agreement as if set forth at length herein. This Agreement contains the provisions governing Buyers requests for a consignment program. As used in this Agreement, the terms Vendor Managed Inventory or VMI will mean the inventory of consigned Products. 2. Vendor Managed Inventory. Buyer will provide (Name of the company) with monthly rolling forecasts. If Buyers forecasts are accepted by (Name of the company), ______will make reasonable commercial efforts to schedule orders and deliver to Buyers Facility a quantity of Products sufficient to meet Buyers forecast requirements. Buyer, without charge, will provide within Buyers Facility a secure and segregated location which meets applicable environmental and electro-static discharge specifications for storing and handling the Products, and trained personnel to handle the Products. If at the end of any sixty (60) day forecast period the quantity of Standard Products forecast to be required for such period is in excess of the quantity purchased for such period, then (Name of the company) will have the right to require return of such excess quantity from VMI. If at the end of any sixty (60) day forecast period the quantity of Non-Standard Products forecast to be required for such period is in excess of the quantity purchased for such period, then Buyer will accept immediate delivery of such excess quantity from VMI and Buyer will be liable to purchase and pay for same. Standard Products which are

returnable will be returned in unused, factory-shipped condition, with seals intact, within the expiration date, if any, and in original manufacturers shipping cartons complete with all packing materials. 3. Title and Risk of Loss or Damage. Ownership and title to Products in VMI will remain with (Name of the company) . Notwithstanding the foregoing, Buyer will be responsible upon delivery of the Products to Buyers Facility for all risk of loss or damage to the Products from any cause, including shrinkage in quantity, theft, pilferage, deterioration, casualty loss, or determination that the Products are not in resaleable condition due to use or handling or conditions under which the Products were stored. Title to the Products shall pass to Buyer upon removal of the Products from the VMI. Buyer will not cause or permit any lien, levy, attachment or judicial process to be imposed on the VMI and Buyer will give Avnet immediate notice if any is imposed. Buyer will be deemed to have purchased the Products and the Products will become nonreturnable upon the earlier of: (i) upon the breaking or removal of the seal of the bag, rail or container in which the Products are packaged; or (ii) the transfer, disposal or use of the Products by Buyer; or (iii) loss, quantity discrepancies, or damage to the Products from any cause determined by an inspection of VMI performed by either party. Buyer will be deemed to have converted the Products in the event of: (i) the imposition of any lien, levy, attachment or judicial process on the VMI; or (ii) Buyers failure to return on request all or any part of the VMI in accordance with this Agreement. Buyer agrees to execute on request, and Buyer hereby authorizes Avnet to execute on Buyer's behalf, a UCC-1 Financing Statement for informational purposes only and not to grant or create any security interest in the Products. Buyer will purchase the Products for its own use and will not otherwise transfer or dispose of the Products without the prior written consent of Avnet. Buyer will not remove the Products from Buyers Facility without Avnet's written consent. (Name of the company) reserves the right at any time to require Buyers immediate return of any or all Products in VMI. 4. Purchases by Buyer. Buyer, on a weekly basis, will provide (Name of the company) with a detailed report showing for the preceding week the inventory balance of Products in VMI and purchases of Products. (Name of the company)will invoice Buyer for all purchases during the period covered by such invoice.

5. Insurance. Buyer will obtain and keep in force during the term of this Agreement: (i) a policy of fire and extended coverage insurance with an all risk endorsement insuring against loss or damage to the Products in the amount of the full replacement cost thereof; (ii) workers' compensation insurance; (iii) commercial general liability insurance covering bodily injury, death and property damage with a combined single limit of one million dollars ($1,000,000); and (iv) employee fidelity insurance. Such insurance will: (i) name (Name of the company) as an additional insured; (ii) be written on an occurrence basis as a primary policy by insurance companies reasonably acceptable to (Name of the company); and (iii) will provide for thirty (30) days notice to (Name of the company) in the event of cancellation or material change. Certificates issued by the insurer evidencing such policies will be delivered to (Name of the company) prior to the delivery of any Products under this Agreement and thereafter at least ten (10) days prior to the expiration or renewal of such policies. The amount and coverage of such insurance will not limit Buyers liability nor relieve Buyer of any obligation under this Agreement. 6. Inspection. (Name of the company) will have the right to enter Buyer's Facility to inspect the VMI or to perform an inventory of the VMI at any time during Buyer's regular business hours. 7. Term and Termination. This Agreement is effective on the date set forth above and will continue until terminated. Either party may terminate this Agreement at any time without cause by giving thirty (30) days prior written notice to the other party. Either party may terminate this Agreement immediately for cause by giving written notice to the other party in the event the other party: i) becomes insolvent or unable to meet its obligations as they become due or files or has filed against it a petition under the bankruptcy laws; or (ii) ceases to function as a going concern or to conduct its operations in the normal course of business; or (iii) assigns or transfers, either voluntarily or by operation of law, any rights or obligations under this Agreement without consent of the party seeking to terminate; or (iv) effects any material change in its management or ownership; or (v) fails to perform any obligation under this Agreement within ten (10) days after written notice thereof. This Agreement may also be terminated by Avnet for cause immediately by giving written notice to Buyer in the event Buyer: (i) removes the

Products from Buyer's Facility for any purpose other than for its own use; or (ii) fails to provide Avnet with evidence of insurance as required pursuant to this Agreement or cancels or allows to lapse such policies of insurance. 8. Effect of Termination. Upon termination of this Agreement, Buyer will return any Standard Products in VMI or delivered or in transit to Buyers Facility as VMI or, if requested by (Name of the company) , Buyer will assemble and make all such Standard Products available for return at a location designated by (Name of the company) . In the event that Buyer fails to do so, such Standard Products will be deemed converted and (Name of the company) will have all rights and remedies of an owner to recover possession of its property under applicable Federal and state law, all of which rights and remedies will be cumulative and may be exercised successively or concurrently. The foregoing is without limitation or waiver of any other rights or remedies available to (Name of the company) . Buyer agrees to pay the reasonable attorney's fees and expenses incurred by Avnet in exercising its rights or remedies hereunder. Notwithstanding termination of this Agreement, Buyer will be liable to purchase and pay for all NonStandard Products ordered for VMI. All freight charges associated with any returns or recovery of Standard Products will be paid by Buyer. 9. General. (a) (Name of the company) and Buyer are independent contractors. Neither (Name of the company) nor Buyer will be considered an agent of the other for any purpose and nothing in this Agreement will be construed to allow either party to make any representation or warranty on behalf of the other. (b) The terms of this Agreement are proprietary and confidential. Neither party will disclose the terms of this Agreement except as required to perform their obligations hereunder. (c) Any notices under this Agreement will be sent by certified or registered mail, return receipt requested, or by recognized overnight courier, to the party to be notified at its address set forth above. Notices to (Name of the company) will be sent to the attention of: Director of Customer Contracts.

(d) If there is any inconsistency between this Agreement and (Name of the company)s Terms and Conditions, this Agreement will control. 10. Entire Agreement. This Agreement contains the entire understanding of the parties and supersedes all prior agreements between the parties with respect to the subject matter hereof. Changes to this Agreement must be in writing and signed by duly authorized representatives of the parties. The parties represent and warrant the persons signing below are expressly invested with the requisite authority to bind their respective corporations in such matters. This Agreement is duly executed as of the date first set forth above. (Name of the company) By: Name: Title: Date: By: _____________ _____________________ Name: Title:________________________________ Date:

BIBLIOGRAPHY

WEBSITES
www.vmi

india.in.com

www.wikipedia.com
www.tata

cosultancy.com

REFERENCES

SD, VMI (Outlook and future ) Publications(7th Revised Edition),Pg-136-153 Banerjee -Challenges and VMI Models (2nd Revised Edition),Pg. 18.6-18.56