Benefits of Vendor Managed Inventory

The Benefits of VMI are numerous for both Manufacturer & Distributor. Here is a partial Listing:

DUAL BENEFITS:

  • Data entry errors are reduced due to computer to computer communications. Speed of the processing is also improved.
  • Both parties are interested in giving better service 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.
  • Stabilize the timing of Purchase Orders – PO’s are now generated on a predefined basis.

    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 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.

      MANUFACTURERS BENEFITS:

      • Visibility to the Distributors Point of Sale data makes forecasting easier.
      • Promotions can be more easily incorporated into the inventory plan.
      • A reduction in Distributor ordering errors (which in the past would probably lead to a return)
      • Visibility to Stock Levels helps to identify priorities (replenishing for stock or a stockout?). Before VMI, 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.

Retail India next Software Requirement- Vendor Management

In india vendor management is little new concept as compared to US or somewhere else abroad. In india vendor management concept is tied into Procurement solutions being implemented by government organizations. SME sector has no defined supplier relationship or vendor management solution in place. Probably companies still dont understand importance of having vendor management solutions in place.

Why do we need seperate vendor management solutions other than Procurement ?

With Vendor Management solutions organizations can bring in Business Intelligence and Decision making metrics in place based on previous dealing etc.

3 metric inputs can be pre-determined based on existing data available with any organization

Warehouse and Inventory management – Time to deliver product from order. product consumption

Financials – Pricing compared to other vendors/previous procurements/ future demand estimation vs cost estimation

Procurement – vendor location, past experience, product quality/certification, RFP related metrics

With retail india dependent on large supplier base for fulfilment of requirements vendor management will become a solution seperate from procurement.

Current verticals in need of vendor management solutions : Finance, Government, Textile.

With travel portals vendor management solutions can be implemented for negotiating better comission structure based on volumes achieved and other co-branding activities.

If an organization can achieve 7-9% reduction in procurement cost then money invested in vendor management solution generally pays off.

Cyberica’s own vendor management solution is in the workz soon we will beta and make available the link for customers to test.

Vendor-managed inventory in the retail supply chain

Vendor-managed inventory (VMI) is one of the most widely discussed partnering initiatives for improving multi-firm supply chain efficiency. Also known as continuous replenishment or supplier-managed inventory, it was popularized in the late 1980s by Wal-Mart and Procter & Gamble. VMI became one of the key programs in the grocery industry’s pursuit of “efficient consumer response” and the garment industry’s “quick response.” i Successful VMI initiatives have been trumpeted by other companies in the United States, including Campbell Soup and Johnson & Johnson, and by European firms such as Barilla, the pasta manufacturer.

In a VMI partnership, the supplier, usually the manufacturer but sometimes a reseller or distributor, makes the main inventory replenishment decisions for the consuming organization. This means the vendor monitors the buyer’s inventory levels (physically or via electronic messaging) and makes periodic resupply decisions regarding order quantities, shipping, and timing. Transactions customarily initiated by the buyer (such as purchase orders) are initiated by the supplier. Indeed, the purchase order acknowledgment from the vendor may be the first indication that a transaction is taking place; an advance shipping notice informs the buyer of materials in-transit.

In this relationship, buyers relinquish control of key resupply decisions and sometimes even transfer financial responsibility for the inventory to the supplier (whether by the letter or spirit of their agreement). The arrangement transfers the burden of asset management from the consuming organization to the vendor, who may be obliged to meet a specific customer service goal (usually some sort of in-stock target).

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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 benefits 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: As mentioned earlier, 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 Pre-packaged 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.

Personally, I’ve had experience in both areas. I would highly recommend purchasing a PrePackaged system. From what I have seen, the benefits justify the costs.

Some of the steps to consider when starting a VMI program

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. Expect to spend a significant amount of time on each step. The steps below assume the use of an EDI based system.

    .….SETUP

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 every item.

Ann00053.wmf (68760 bytes).…GOING LIVE

Step7- Distributor makes a sale and enters that transaction into their computer.

Step8- On a daily/weekly basis the Distributor  sends an #852 Product Activity. This reports a change in position
on any item since the last #852.

Step9- The Manufacturer receives the #852 and updates the Distributors Stock Plan. Once an Item or Items
have hit their Reorder Point (ROP), the Manufacturer creates an Order.

Step10- The 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.

Step11- The 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.

Step12- When 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 (mis-shipped etc)

Step13- (optional)- The Invoice is sent out via an #810. Payment by a #820…

 

Why would a company want to be involved in a Vendor Managed Inventory program?

DUAL BENEFITS:

  • 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.

Anb00009.wmf (16048 bytes)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.

Anb00010.wmf (10402 bytes)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.

VENDOR MANAGED INVENTORY

What is Vendor Managed Inventory (or VMI) ?
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.

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.

 Vendor Managed Inventory promotes a strong partnership between the Manufacturer and the Distributor. Click on the links below to learn more about setting up a VMI program.

Vendor Managed Inventory v/s Self Managed Inventory

Vendor Managed Inventory (VMI)   VMI is a process where the supplier maintains and replenishes the Inventory of the customer based on demand information sent by the customer. During this process the supplier is required to fulfill to mutually agreed objectives for inventory levels, transaction costs and product price.  

Indian Context: 

Vendor Management Inventory in its row form is commonly practiced at all retail outlets, but in an unorganized manner. It is commonly observed at a busy retail store or a family owned store, where salesman of a particular company walks in and asks for any order. The store-owner places the order for the stock-out items and many a times the salesman is asked to take a look at/round to check for stock-out for products supplied by him at the store-racks. The salesman on his own writes down the order for replenishment and takes the store owners approval and delivers on regular basis. VMI is a backward replenishment model, where instead of the customer managing his inventory and deciding how much to order and when, the supplier gets the Purchase Order from the system and fulfills the demand.

Vendor Managed Inventory (VMI) is designed to facilitate the replenishment of goods such that it provides cost saving benefits to both suppliers and retailers and their customers and thereby reduce costs, inventory levels and increase profits. VMI is an important component of distribution chain management, by providing a mechanism to allow the supplier to manage and replenish merchandise at the store or at the warehouse level. Using VMI, it is assumed that retailer supplies the vendor with the information necessary to maintain just enough merchandise to meet customer demand and to do so a mechanism in the system is provided to creates the purchase order from the system for the items reaching the ROL (Re-Order Level) for an order of quantity as per the ABC analysis or equal to ROQ (Re-Order Quantity) and then the PO is automatically mailed to supplier to arrange for the delivery. This can further be extended to the manufacturer to provide him of the demand/data to enable him to plan for production planning & logistic.

The VMI is not gaining the momentum as it should have got due to various reasons.

1.      Firstly, they do not have practice of placing order in writing, many a times they order on phone.

2.      Security and confidentiality of data is their primary concern.

3.      The retailers do not want the system to decide their demand.

4.      PO generation involves their commitment and finance and they generally prefer it to be manual or under their control.

5.      Over the years, they have been maintaining the system in their own traditional way and they do not prefer changing over to other system unless they are assured that new system is going to work exactly the same way taking care of his finance and security and also relieve him from pain of maintaining the manual reordering details.

     

Let’s ask following question to understand the benefits of Supply Chain Management

 1.      Why is managing Inventory Important? 

Efficient Inventory Management is the key factor to decide the success of the company. The Dead Investment in Inventory and out of stock situation both results in to loss of money & opportunity, while maintaining Just-in-time Inventory is very tricky and can be attained only with good inventory management system in place. It is very vital and important for all businesses not only from the profitability point of view but also from the CRM perspective.  Indian customer is maturing and their requirement is changing fast and with the development in the technology they are demanding and asking for more and fast response as available from the competitor, so retailing is really becoming highly competitive business.

 2.      Does it make sense to go for Inventory management software in the era of ERP? 

There are times when the one needs to take a call on whether to depend on the available legacy system to take care of Inventory management. ERP system would definitely give you better control on your inventory and forecasting with lot of MIS for decision making but if it is available only at the management level and not available with the store, warehouse & logistic team then it may warrant the need for inventory management software. It is being observed that ERP system in place at the companies are designed keeping in mind the business process in place at that time, but over a period the business process goes through several changes and ERP systems generally do not allow to accept the changes, take simple example of bar-coding, which most of the ERP systems do not have provision for.

 3.      What are the problems faced by manufacturers while managing Inventory? 

The major problem faced by Manufacturer is not knowing the demand of their product in the market and the data to keep the level of stock to meet the current and future demand and hence not able to plan for production. The major issue is in implementing the demand chain solution across the different platforms and among various channel partners to integrate information and get live secondary data to act and respond to the demand and supply. Also the movement of goods from one warehouse to another and maintaining of delivery dispatch details and generation of Barcodes in real-time to track complains with respect to the batch in which the product was manufactured. Many of the above issues are managed manually, resulting in poor response time and loss.

 4.      How do these solutions help them? 

The Inventory Management solution can help to a greater extent if it offers the following:

 ·        Just in Time Inventory:  Keep the stock only for the present and near future demand, without piling of stock and dead investment in the stock.·        Avoid Stock-Out: By placing the order before the stock-out is reached.·        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.·        Free Fund Flow: Utilize the fund in better Ambience, CRM which otherwise was blocked in stocks due to poor inventory management. 

At Quicksoft, we have various solutions and suit of products to cater to diverse requirements of different retail verticals. Different versions of ArtRM – The Art of Retail Management, Point of Sale solution is available for Supermarket, Departmental Store, Optical Store, Electronic Store, Jewellery Store, Petrol-pumps, Mobile Phone Shops, Pharmacy/Medical Stores, Restaurants, Garment Store, and Community Retail Outlets for Company Employees and Members for Cash-Less Shopping.

 ArtRM for Self Inventory management  

Quicksoft specializes in Point of Sale solution for different retail verticals, Chain store management for remote Inventory Management to take care of the following issues.

1.      Integrated point-of-sale and in-store functions to take care of Retail Management System Store Operations

2.      Module to create new items, set pricing and discounts, generate purchase orders, stock receipt and stock transfer and stock conversion, Invoicing & Accounting.

3.      Ability to see and control inventory with built-in barcode generation modules and manage Inventory across multiple warehouses using the system generated barcodes or manufacturer’s (EAN) barcode.

4.      A pre-packaged solution that offers low licensing costs and rapid investment returns

5.      Highly customizable features for individual needs

6.      Built-in security system to restrict employee access to sensitive information

7.      Detailed sales data for data warehousing  and business intelligence analyses

8.      Ability to view inventory levels at all the stores in the enterprise

9.      Support for Data Synchronization from different locations.

The required software components that enable you to successfully manage your chain store operations are:

·        Client POS Software with store business processes & operations.

·        facility to Synchronization Data to Remote Server for further MIS.

·        Web-based Interface for Remote Inventory Management & MIS.

  ArtRM for Inventory Managed by Vendor (VMI) 

Quicksoft ArtRM – The Art of Retail Management, Point of Sale solution for Retail Outlets has come out with different solution for diverse needs of the Retailers. The VMI enabled version of ArtRM software automatically generates PO to designated vendor on reaching the re-order level and shoots out the mail to the vendor, vendor in turn can accept the PO and send the approval and delivery/dispatch details.

 For a complete list of features and more information, visit the website at www.quicksoftservices.com

  What are the things a Retailer must look for in an Inventory System? 

The Inventory system should be looked at from the point of overall goal of the organization and not from the particular department or warehouses need/requirement. If you are already using some system, which does not give you desired inventory management then first you need to talk and discuss with the software company who has already given you some solution, because going for another solution and using multiple software to take care of inter related issues is advisable to be available in the single system to enjoy the benefit of data integration and generation of MIS from different modules. One needs to be clear in terms of the requirement and if possible should first get proper requirement analysis to be done. If the separate solution is desired then it should be possible to import/export data from the system with following modules.

You must take due care to prepare the check-list to meet your requirement and not depend on someone’s personal judgment. Remember the wrong selection of the software amounts to:

·        Loss of Management time & Opportunity and Loss of sale

·        Software Cost

·        Physical & Hidden training cost and Re-training.

·        Poor stock management and mis-match in physical stock-taking and stock reported by the software.

 VMI a Missing Link in ERP/CRM/SCM  

The key to success for any business is the customer’s point of view. Be it availability of the new products is concerned or faster replenishment, offering of new schemes or mode of payment, personalization, comfort, convenience, ambience or the quality of the product, the improved CRM at every stage of business will definitely give edge over others.  The use of scientific methods and better Supply Chain Management and Demand Chain system with sound logistic system has lead to Success for Amazon, Wal-Mart and various others. Manufacturers can play a major role in introducing and convincing their channel partners to implement VMI and CRM systems to succeed.

 Return on Investment  

Rather than the Cost, the commitment to implement the system is what is required. Initial Cost Involved may be high and ROI may look far fetched, but it should be looked at from the wider perspective as it brings in lot of system and discipline within the organization which will result in addition of the value paid precious clients which will give returns many fold then the Arithmetic’s of ROI.

 Recommended System Requirements:Pentium PC with 256MB Ram 1GB Disk Space (additional required for OS caching during processing.)Windows 98, NT, XP, 2kX 

About Quicksoft Services :Founded in 1988 in India, Bombay, Quicksoft Services is a provider ofWindows and web-based software products and digitizing, conversion &BPO services. For more information on Quicksoft Products, call at (91)22-67551855 or write to quicksoft.services@gmail.com or visit us at www.quicksoftservices.com.

 CONTACT INFORMATION 

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Hitesh Trivedi

QUICKSOFT SERVICES

Visit Our Site: http://www.quicksoftservices.com

+91-22-67551855

Email : info@quicksoftservices.com   

Vendor-Managed Inventory: Size Matters

While there is no such thing as a toilet paper fairy, there are inventory fairies. Better referred to as vendor-managed inventory (VMI) technicians, these folks assume responsibility for inventory planning and replenishing stock when it is low.

For many, Wal-Mart has set the standard for a well-oiled VMI machine. Widget makers and potion peddlers are responsible for getting their products to the store, stocking the shelves and making sure there is no shortage or overstock of any items.

For the distributor, it means less work and less risk. For the supplier, it means inventory is set up how and where you want it, and you have the opportunity to educate associates and employees about your wares. It also means more risk.

While the VMI plan works well for the manufacturer/distributor relationship, what about the manufacturer/ manufacturer relationship?

According to IndustryWeek‘s Best Plants 2006 Statistical Profile, 56% of the top 25 plants between 2002 and 2006 have used “resident suppliers” to manage or replenish inventory. However, the average percentage of purchased materials and components (dollar volume) managed by on-site suppliers is only 13.7%.

So, it seems, there is a time and place for vendor-managed inventory.

For example, if you’ve got an expensive manufacturing line and you ask one of your key suppliers to put in the systems and develop the expertise to supply the goods you need on a just-in-time basis, they will do that if they receive a significant portion of their revenues from you, says Steve Banker, service director of supply chain management at ARC Advisory Group, Dedham, Mass.

“However, you may have a lot of suppliers where you are only 1% of their total revenue — you are not their biggest priority,” Banker says. “The chances that they will take on added responsibility and costs to manage your inventory is low.”

In addition, there is a certain amount of IT integration that has to go on in order to make the VMI relationship work.

“For suppliers, they need to be able to get your forecasts on a regular basis, make intelligence out of them and have visibility into your inventory levels on an ongoing basis,” says Banker. “Turning that into useable intelligence is kind of difficult. Small and midsized companies often don’t have the dedicated IT resources to make that happen, so they struggle.”

For manufacturers that do partake in vendor-managed inventory, “the most advanced forms involve having a warehouse for your key supplier close to your factory,” says Banker. “Often what happens is there is a line in the factory and the goods come into the factory and they are still owned by the vendor until they cross over that line. VMI can drive more business, but sometimes it is implemented in a way where it affects cash flow. The supplier to the manufacturer ends up owning inventory for longer periods of time and ends up carrying more inventory risk. That often is a tradeoff for gaining more business.”

Six Steps to a Successful VMI System

1 COMMUNICATE expectations of all parties
2 Customer must commit to sharing PRECISE information
3 Supplier must ensure RELIABLE transmission, receipt, and use of information
4 Sufficiently TEST systems before going live
5 Expect implementation to be a PROCESS not a project
6 Plan to spend sufficient TIME AND MONEY to make it work

Vendor Managed Inventory (VMI) systems came into vogue in the 1990’s as a way to decrease supply chain costs. Unfortunately, last year’s inventory crises left many manufacturers greatly disappointed when their new systems did not create the promised return on investment.

Robert Schoenthaler, VP of SC solutions at KPMG Consulting Inc. has pointed out, “The lesson learned in supply chain management is that it is a journey, not something that can be solved in a single project. In the 1990s there was an explosion of growth in planning tools. Now the question of ‘how do I execute’ is becoming more important.” (1)

VMI is not a perfect solution to inventory problems. Susan Cohen Kulp, a researcher at Harvard University, recently finished a study on the relationship between VMI systems and higher profits. Not surprisingly, she found that implementation does not always return better results than a traditional supplier relationship. Her study found that information precision and reliability, combined with an effective sharing mechanism, were the key factors in obtaining higher supply chain profits.

So, how do you implement a successful VMI system?

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 party’s financial and other responsibilities.

2 – Customer must commit to sharing PRECISE information. Suppliers must have visibility into the customer’s 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 customer’s 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 we’ve 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.

tWe found two compelling stories about companies who have recently gone public with their VMI successes.

ST Microelectronics N.V. and Hewlett Packard began using their well-planned VMI system in the summer of 2001. Gilles Sanchez, ST’s 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.(4) Click here to see the article.

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 year’s 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.(5)Click here to see the article.

What happens when the economy turns around and we start seeing shortages again?

Ismini Scouras of EBN thinks suppliers may not be as motivated to implement VMI when demand picks up and they no longer have to differentiate themselves as they do in today’s environment(6). Scouras suggests that inventory management should be taken on by distributors instead of suppliers who may not demonstrate a satisfactory level of commitment.

Some distributors already perform VMI tasks, but many are not yet technically equipped to manage the service. Another option is to task third-party logistics providers (3PL’s) with managing inventory. Andrew Gort is executive vice president of global supply chain management at Celestica, Inc. and says his company “began to use 3PLs three years ago when distributors didn’t provide that service without having to place an order for components” (7).
Whoever ends up owning the VMI process, one thing is clear. Communication is the key to successfully implementing a vendor managed inventory program of any kind. Precise and reliable information must be shared and tested throughout the implementation process which will require substantial time, money, and effort.

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