VENDOR MANAGED

INVENTORIES

Supply Chain Management

Assignment 1 – Reading 5
May 17, 2004
THE WAY FORWARD …….
- TEAM

Manoj Sekhar –
Zaheer Ahmed
Biju –
Deepthi S –
Sara Brito - 2532396
 THE WAY FORWARD …….

• What is VMI ?
– Vendor Managed Inventory
• A Distribution Channel Operating System
• Purpose of VMI ?
– A system by which a Mfg/Vendor
• Monitors & Manages the inventory of
Distributor/Retailer
 THE WAY FORWARD …….

• Tactical Activities of VMI

– Determining appropriate order quantities
– Managing Proper Product Mixes
– Configuring appropriate safety stock levels
 THE WAY FORWARD …….

• VMI Rationale
– Decision making responsibility is pushed up the
supply chain, to enable the mfg/vendor to better
support the objectives of the entire integrated
supply chain
• Resulting in sustainable competitive advantage
• Centralizing the replenishment decision thus helping
reduce distortions in ordering

VMI Allows information to be used more intelligently

 THE WAY FORWARD …….

• Primary Mechanisms of VMI

– Strategic Element
• Less time on physical inventory counts
• Less time finding misdirected inventory
• Less time entering data into large customised systems
– Technological Competency
• Cross-docking, Advance Shipping notices, barcoding and
other electronic enhancements
• Electronic Data Interchange (EDI)
• Point of Sales (POS) and inventory information retained by
Dist/Retailer

VMI Allows information to be used more intelligently

 THE WAY FORWARD …….

Retailer Inventory Levels

& 1. Product data exchange – EDI 852

Sales History
Retailer WHSE
/Store

3a. Retailer received – EDI 861 PRODUCT

3b. Payment Advice – EDI 820 Vendor

2a. PO(Purchase Order) – EDI 850

2b. ASN(After Shipment Notice) – EDI 856
2c. Invoice EDI 810
Retailer
 THE WAY FORWARD …….

• Challenges for Implementing VMI

– Systems / Data limitations
• Broad Range (Configuration, Operational, Procedural issues)
– Narrow the Focus
– Process & Conceptual Concerns of the Pilot Program
• Pre-conceived beliefs of Distributors/Retailers that they can
manage its inventory better than the vendors
• Limitations of existing computer system
– Initiate improvement goals for vendors involved in the pilot
program
 THE WAY FORWARD …….

• Challenges for Implementing VMI

– Redefining the relationship with the vendor
– Handing over previously considered proprietary
information
– Handing over new processes & tasks
– Setting up new metrics for measuring the
vendor’s performance
– Setting up establishing electronic connections

VMI – Moving the organization in the right strategic direction

 THE WAY FORWARD …….

• Benefits from VMI

– Better Forecasting
• Lowered Investment in the Supply Chain
– Less Overstocking
• JIT Delivery
– Greater Inventory Turnover
– Improved Customer Service
• Fewer stockouts
• Optimal Product Mixes
– Ordering Raw Materials Efficiently
• Schedule Production
• Transportation
– Develop Closer Ties with Customers
• Observing End-User Consumption
• Observing General Market Trends
 THE WAY FORWARD …….
• Benefits to Mfg/Vend
– Lower Inventory
investment (Raw &
Finished)
– Better Scheduling &
Planning
– Better Market Information
– Closer Customer Ties &
preferred status
• Benefits to Dist/Ret.
– Fewer stock-outs with
higher turnover
– Better market information
– More optimal product
mixes
– Less inventory in channel
(transfer costs)
– Lower administrative
replenishment costs
 THE WAY FORWARD …….

• Customers Patronizing VMI

– K-Mart
– ACE Hardware
– Fred Meyer
– Grand Union
– Oshawa Foods
– Panduit
 THE WAY FORWARD …….

• The Strategic Approach

– Focus Your Efforts
– Trust & Partnership between Supply Chain
Stakeholders
– Highly Effective Computer Systems
– Competent Mfg/Vends and the Ability to
Forecast
– Willing Stakeholder Partners & Patience

VMI – cannot be set overnight

 THE WAY FORWARD …….

• VMI’s Problems
– Complex Questions
• Is solid & comprehensive data (POS) available?
• Does the Mfg/Vendor have the capabilities in the area of
forecasting or retail inventory management ?
– Does the Mfg/Vendor understand’;
• The true nature of POS data?
• How the Dist/Ret is using the stock that is ordered?
• How long the units were inventoried?
• 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?
 THE WAY FORWARD …….

• VMI’s Problems
– Complex Questions
• How flexible will the system be in the event of required changes & modifications -
to have the ability to forecast accurately based on?
– Promotions?
– Seasonal Variations?
– New Product Introductions?
– Selling incentives?
• What percent of their total volume do the VMI vendors sell through the distributor
/ retailer?
• Will there be minimum volume or exclusivity requirements? What product items
are being considered ?
– For what type of Products VMI will or will not work?
• Can Mfg/Vendors and Dist/Ret. Align themselves to seek long term profitability ?
– Mfg/Vendors want to maximize inventory
– Dist/Retailers want to minimize inventory
 THE WAY FORWARD …….

• Outlook And Future Of VMI

– Acceleration of trends towards’;
• Cycle Time Compression
• Reduced inventory
• Increased inventory velocity
• Greater use of EDI
• Information Tech. & SCM will affect the future growth &
development of Logistics
– Pooling of Shipments as a Logistics Strategy
– Closer Attention to Supply Chain Management
– VMI programs will grow substantially in the near future
 THE WAY FORWARD …….

• Conceptual Evolution of Inventory

Management

Owner Continuous Consignment

Direct
Managed Replenishment VMI Selling
Selling
Inventory CR CS
 THE WAY FORWARD …….

• Recommendations
– VMI should not be viewed solely as a cost
reduction method for one of the players in the
supply chain
– It should be viewed as a tool to successfully
• Manage the Whole Supply Chain
• Reduce Costs
• Provide Greater Value to the Consumer
• Spread Savings to All Participants
 THE WAY FORWARD …….

• Conclusions
– By Forming alliances with partners early, long
term viability is greatly enhanced with future
uses of Technology including Internet
– “Tailored Logistics Strategy” (TLS)
incorporates only the tenets of VMI/EDI that
apply to an organizations unique needs
• TLS approach will increase the probability of
success with VMI programs and related
improvement techniques

VMI will not dominate all logistics thought & practice

THE WAY FORWARD …….