Vendor Managed Inventory

VMI is a process where the supplier generates orders for the customer based on demand information sent by the customer. During this process the supplier is guided by mutually agreed to objectives for inventory levels, fill rates and transaction costs. There are two EDI transactions at the heart of the process.

Determining appropriate order quantities Managing proper product mixes Configuring appropriate safety stock

Why VMI? Global supply chains complex compared to domestic ones Reduction in inventory carrying costs Fewer supply chain professionals

Increased Sales

Lower Administr ative Costs

Supply Chain level:

Lower inventory levels at total supply chain level. Less overhead. Increased sales. Reduces human data entry errors.

End-users: Increased service level. Reduced stock outs.

Lower Customer Inventorie s

Reduces Bull-Whip Effect

Lower supplier inventory

Suppliers: Reduced replenishment times and lower inventory costs. Increased sales through reduced stock outs. Less redundancy. Build strategic strengths through establishing strong supply chain relationships. Vendor assistance with category management.

Vendors:

Better insight in customer demand (better resource usage, reduced raw and finished goods inventories). Improved, more direct communication with customers. Improved market analysis. Increased sales via lower out of stock rates. Opportunity to provide category management and other value-added services.

Manufacturers: Lower inventory investments (raw and finished) Better scheduling and planning Better market information Closer customer ties and preferred status 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

Success of VMI initiative depends on the strength of relationship between the vendors and retailers. Increased dependency between the parties and increased switching costs. Lack of trust to exchange data can result in the ineffective implementation in one or more of the following forms: Inventory invisibility. Inventory imbalance. Costs of technology and changing organization. Extensive data- and EDI testing is needed.

Special promotions or events need to be communicated beforehand to avoid replenishment planning mistakes (loss of flexibility). Increased vulnerability for non-foreseeable risks such as employee strikes, hurricanes, etc. due to lower inventory levels. Most of the benefits are for the end client and for the selling party, while the vendor does much of the work.

Phenomenon observed in forecast driven distribution channels Is basically the amplification of the demand variance up the supply chain, from customer to factory , as demand information passes back through the supply chain.

Issues: Excess Inventories Quality Problems Increased Raw Material Costs Increased Shipping Costs Lost Sales Lost Customer Service

Company X produces widgets for sale on the open market Customer demand for Company Xs widgets become stagnant Retailers offer a sale promotion to boost sales of Company X widgets Retailers fail to notify manufacturers of sales promotion Company X assumes that the demand for widgets has increased Company X increases inventory to allow for increased manufacturing of widgets Company X notifies part suppliers of increased demand Suppliers increase inventory to meet demand

Distorted information along the supply chain caused the inventory levels to increase along the supply chain which may result in increased inventory costs, poor customer service, adjusted capacity and other problems which are associated with the Bullwhip Effect

Demand Forecast Updating Rationing Gaming Order Batching Price Variations

Given customer demand and stock levels, suppliers can automatically replenish a trading partners inventory without the need for approved purchase orders

3 Primary Dimensions of VMI Implementation Information Technology Process Redesign Organizational Support

Information Technology
Global VMI : A tool for effective supply chain management Sole use for replenishment decisions Investment in IT to enable supply chain visibility Use of Global VMI for real time supply chain integration

Process Redesign
Change in roles and responsibilities of personnel Investment in redesigning the supply chain to link more effectively with suppliers/customers Modification of supply chain activities (eg: Purchasing, order fulfillment process etc) during and after Global VMI application

Organizational Support Strategic Imperative : Optimization of supply chain performance and achieving competitive advantage

Management and Organizational Support : Support from Purchasing/Sales Dept, IT Support and Top management support Supplier and Customer Relationship : Satisfying mutual needs, Cross investment on major projects, Cross organizational team to manage replenishment, Negotiating service levels and inventory targets

1. 2. 3. 4. 5. 6. 7.

8.

Maximize sharing and integration of data Aggressively invest in ICT to enable supply chain visibility and real time integration of supply chain Select, design and implement VMI applications that are congruent with companys business processes Redesign supply chain processes to align with customers/suppliers Redefine roles and responsibilities of personnel Obtain senior management and organizational support Charge a cross functional team with responsibility to build trust and manage connected activities with other partners Be proactive

e-grocers go out to conquer market shares with essentially only one service - home delivery of ordered goods, as their competitive weapon.

E-grocery currently caters to only the Shopping avoiders, necessity users, new technologists. It does not attract the time starved, responsible and traditional shoppers.

The current competitive advantage of e-grocers would be nullified if the traditional grocers started home delivery of goods. The electronic communication channel between the e-grocers and the customers is not fully exploited and is currently used only for data transfer. Availability of technologies like bar code and RFID

Value Proposition: e-grocer takes responsibility for its customers' product availability. E-grocer would be able to create real, concrete value as most people do not really enjoy ordering the same basic products day after day but merely want their households to be equipped with what they need when they need it.

1)

2)
3)

Data Capture Data transfer Data Management

The data communication infrastructure has already been created by the e-grocers when they started using data transfer over the Internet as a means for displaying product information as well as receiving orders. The inventory management component can be created along the principles of application services that are now launched to small businesses. The big issue is to come up with a good solution to the data capture problem

Profiles based on buying habits Data capture in the household

What does it mean? The e-grocer can create customer profiles that reflect the individual buying habits of these customers. The profiles can then be used in order to predict each customer's future needs. Advantage: Technology needed for gathering data already exists. Problem: Uncertainty is inherent in a system that relies solely on predicting the future based on historical data

Alternatives: 1) Flow control based data capture Data on a material flow are collected 2) Inventory count based data capture - Data on the momentary inventory situation are regularly collected

Requires active customer participation as he needs to notify the data capture system each time an item is added to removed from the inventory system. Easy to implement as only an Internet connection and a bar code reader are needed. E.g Refrigerator equipped with Internet connection and a bar code reader.

The reader device performs an inventory count by regularly scanning what items are currently stored in, for example, the customer's refrigerator. The inventory data obtained are then sent over the Internet to the e-grocer. Next, the database entries corresponding to this customer's inventory are updated. The e-grocer's inventory management system checks if the customer is running low on any of the items. When needed, the system schedules replenishments to the customer.

Challenges for use of RFID: Technology availability Cost effectiveness Possible Solution: Re-progammable recyclable tags.

Variety Large Package Sizes

Customer No need to remember what and when to order E-grocers Competitive advantage over traditional grocers Increased customer loyalty More stable demand More knowledge about the customers

Existing model suits only continuous demand More research is also required in order to discover what new value offerings will be needed for the e-grocers to be able to offer also different kinds of demand more efficiently. A ``plan and forget'' calendar based service could, for example, be the answer to occasional demand and a ``capture and enjoy'' service a way to capture impulsive, irregular demand.

Vendor Managed Inventory (VMI) is designed to facilitate transfer of information through an information system and to provide major cost saving benefits to both suppliers and retailers customers. As part of the program The retailer supplies the vendor with the information necessary to maintain just enough merchandise to meet customer demand. This enable the supplier to better project and anticipate the amount of product it needs to produce or supply.

VMI is a backward replenishment model where the supplier does the demand creation and demand fulfilment. Instead of the customer managing his inventory and deciding how much to fulfil and when, the supplier does. With information available at a more detailed level, it allows the manufacturer to be more customer-specific in its planning. VMI concepts are being applied at both the distribution center-level and the store-level.

The retailer and the supplier must establish clear guidelines on inventory levels and fill rates. The VMI process involves exchange of critical and sensitive information between retailer and supplier. If this data is not shared or not accurate as per the established guidelines, it will have severe impact on the overall success of the VMI process.

Management Commitment and Buy-in from Inventory Staff

Employees should be given a complete overview of VMI Objectives of this process should be communicated to the organization The support of inventory analysts, e-business analysts and

replenishment planners are very essential for the success of this program.

Data Synchronization and EDI Set Up

The product data and other catalogue information should match

between retailer and vendor. Product data should be audited and differences with respect to same should be resolved. Process for communicating the product data changes should be established. Ensure that the vendors are setup in EDI system.

Setting up the Agreements

Agreements on inventory turns, fill rates, frequency of replenishment

and SLAs should be predetermined.

Data Exchange
Two types of data exchange occur One is a one-time exchange of retailers sales history that allows the

supplier to base the inventory. The second type is ongoing product activity data exchange.

Ordering
The vendor calculates the reorder point (ROP) for each item based on

the movement of data and any overriding guidelines established. The VMI customers generally receive priority service for replenishment.

Invoice Matching
Measurement
The parameters used to measure success of VMI are improvements in

inventory turn over, stock availability, inventory reduction and distribution.

Successful implementation of VMI often depends on computer platforms and communication technology both at the retailer and supplier end Electronic data interchange (EDI) is an enabler, but not a requirement for VMI. Uniform Communication Stds. defined by Uniform Code Council UCS 852: Warehouse withdrawal and inventory information UCS 855: Supplier replenishment decisions UCS 856: Advance shipment data

The Impact of Vendor Managed Inventory on the Bullwhip Effect in Supply Chains by Allan Neves Portes & Guilherme Ernani Vieira http://en.wikipedia.org/wiki/Bullwhip_effect Enhancing Business Performance via Vendor Managed Inventory Applications by Peter Duchessi and Indushobha Chengalur-Smith Use VMI to improve forecasting by Larry Lapide, PhD, The Journal of Business Forecasting at MIT Vendor Managed Inventory by Rajiv Saxena, VP of global supply chain engineering at APL Logistics What is VMI? , Carl Hall, Enterprise Data Management, Inc. Copyright 2001. VMI: Very Mixed Impact, James Aaron Cooke, Senior Technology Editor, Logisticsmanagement.com http://www.12manage.com/methods_vendor_managed_inventory.html

Thank You