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

Step1Senior 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.

Step2Employee 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.

Step3Synchronize 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. 
   
Step4EDI 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.

Step5Acceptance & 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.

Step6POS 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.

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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.

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