Vendor Managed Inventory

VMI Concept
 It is a streamlined approach to inventory and order fulfillment where the
supplier, instead of the retailer, is responsible for managing and
replenishing inventory using EDI for electronic transfer of data over a
network

 It is a supply chain optimizing practice where the inventory is monitored,

planned and managed by the vendor on behalf of the consuming
organization(retailer), based on expected demand and on previously
agreed minimum & maximum inventory levels

 VMI can be distinguished in two forms:

 A wholesaler manages inventory levels for retailer. This is also known as Efficient Consumer
Response(ECR). Retailer still owns the inventory, with replenishment done by wholesaler
 A manufacturer manages inventory levels for distributor. Distributor still owns the
inventory, with replenishment done by manufacturer

Vendor Managed Inventory 2

 Conventional Business Model
 Sales forecasted in replenishment system of retailer using historical sales

data.
 Retailer tracks sales & inventory information and forecasts the orders

 Purchase Orders(PO) are created and communicated to the vendor using EDI

 Vendor assesses order fulfillment based on available inventory at his end

 If inventory available, vendor ships it to retailer’s warehouse/store and Adv.

Shipment Notice (ASN), and EDI document communicated to retailer

 Vendor then sends invoice to retailer

 Retailer, on receiving the product, does invoice matching and payments are

handled through their account payable system

Forward Replenishment Model

Vendor Managed Inventory 3
Vendor Managed Inventory 4
 VMI Business Model
 Retailer sends sales & inventory information to vendor via EDI

 Vendor creates PO based on established inventory levels and fill rates

 Vendor sends ASN before shipping the product

 Upon receiving the acknowledgement to ASN, vendor sends the invoice to retailer and

ships the product

 Retailer, on receiving the product, does invoice matching and payments are handled

through their account payable systems

Backward Replenishment Model

Vendor Managed Inventory 5
Vendor Managed Inventory 6
 VMI highlights
 VMI results in improving inventory costs & service levels, thus enhancing

SCM
 Forecasting & replenishment is carried out by vendor

 VMI provides for smoother demand, increased sales, lower inventories and

reduced costs of lost of sales

 VMI project is a BPR activity which uses Information Technology

 VMI helpful in overcoming Bullwhip effect

 VMI provides a competitive advantage to the retailer & vendor

 VMI should eventually evolve into CPFR

Vendor Managed Inventory 7

 VMI benefits for Retailer
 Reduces inventory
 Reduced stock outs
 Reduced forecasting & purchasing activities
 Increase in sales
 Planning & ordering cost decreases as responsibility shifts to vendor
 Service level improves
 Purchasing transactions become fast
 Improved communication between retailer & vendor
 Eliminates paper work and improves data accuracy
 Focus can be increased of after sales service and other value added
service for customers

Vendor Managed Inventory 8

 VMI benefits for Vendor
 Improved visibility leads to better forecasting
 Reduces PO errors and potential returns
 Sales promotions can be easily incorporated in inventory plan
 Visibility in stock levels helps to identify priorities
 Opportunity to provide other value added services to customer

Vendor Managed Inventory 9

 Challenges to VMI
 In providing priority service to VMI partners, some vendors reserve
inventory which leads to shortages for other customers

 Insufficient level of system integration leads to incomplete visibility

 Lack of trust and skepticism from employees

 Limited level of collaboration

 High expectations from retailers

Vendor Managed Inventory 10

 VMI Applications
 Multiple outlets, fast moving consumer goods
 Error sensitive industries like Pharmaceuticals
 Perishable goods
 Valuable & unpredictable component

Vendor Managed Inventory 11

 Global & Indian Co. using VMI
 Wal-Mart(distributor) and Proctor & Gamble(vendor)
 Godrej(manufacturer) & Boyce(vendor)

Vendor Managed Inventory 12