| One of the keys to making VMI work is shared risk. | | | | Reduced forecasting As the supplier does the |
| Often if the inventory does not sell, the vendor | | | | forecasting and creating orders based on the demand |
| (supplier) will repurchase the product from the buyer | | | | information sent by the retailer, the retailer can |
| (retailer). In other cases, the product may be in the | | | | reduce the costs on forecasting and purchasing |
| possession of the retailer but is not owned by the | | | | activities. |
| retailer until the sale takes place, meaning that the | | | | Increase in sales Due to less stock out situations, |
| retailer simply houses the product in exchange for a | | | | customers will find the right product at right time. |
| predetermined commission or profit. | | | | Customers will come to the store again and again, |
| VMI helps foster a closer understanding between the | | | | thereby reflecting an increase in sales. |
| supplier and manufacturer by using Electronic Data | | | | To the Supplier |
| Interchange and other statistical methodologies to | | | | To satisfy the demand, suppliers usually have to |
| forecast and maintain correct inventory in the supply | | | | maintain large amounts of safety stocks. With the |
| chain. Vendors benefit from more control of displays | | | | VMI process, the retailer sends the POS data directly |
| and more contact to impart knowledge on | | | | to the vendor, which improves the visibility and |
| employees; retailers benefit from reduced risk, better | | | | results in better forecasting. |
| store staff knowledge, and reduced display | | | | Reduces PO errors As the supplier forecasts and |
| maintenance outlays. | | | | creates the orders, mistakes, which could otherwise |
| The VMI provides improved visibility across the | | | | lead to a return, will come down. |
| supply-chain pipeline that helps manufacturers, | | | | Improvement in SLA Vendor can see the potential |
| suppliers and retailers improve production planning, | | | | need for the item before it is actually ordered and |
| reduce inventory, improve inventory turnover and | | | | right product is supplied to retailer at right rime |
| improve stock availability. The VMI concept is being | | | | improving service level agreements between retailer |
| widely used in many packaged consumer goods | | | | and supplier. |
| processes where the end-user's demand for products | | | | Encourages supply chain Partnerships and |
| is relatively stable with short-term fluctuations in | | | | collaborations are formed that smooth the supply |
| supply chain. | | | | chain pipeline. |
| Activities Involved in VMI | | | | Steps for Successful VMI |
| In VMI process, the retailer is free of forecasting and | | | | VMI is not a perfect solution to inventory problems. |
| creating the orders as the vendor generates the | | | | Information precision and reliability, combined with an |
| orders. The vendor is responsible for creating and | | | | effective sharing mechanism, were the key factors in |
| maintaining the stock plan for the retailer. The vendor | | | | obtaining higher supply chain profits. |
| sends the shipment notices before shipping the | | | | -Expectations of all parties must be communicated.. |
| product to the retailer's store/ warehouse. Then he | | | | -Customer must commit to sharing precise |
| sends the invoice to the retailer. Upon receiving the | | | | information. |
| product, the retailer does the invoice matching and | | | | -Suppliers must ensure reliable information. |
| handles payment through their account payable | | | | -Systems must be sufficiently tested. |
| systems. | | | | -Expect implementation to be a process not a |
| Commitment If a retailer is establishing the VMI | | | | project. |
| process, it should be treated as a strategic initiative | | | | -Plan to spend sufficient time and money. |
| and the objectives of this process should be | | | | Challenges and Limitations |
| communicated to the organisation. The strategic | | | | The VMI approach has its own set of challenges and |
| management team should understand the concept of | | | | limitations: |
| VMI and employees should be given a complete | | | | -Some companies continue to manufacture to stock |
| overview of VMI and the benefits the organisation | | | | without leveraging customer specific data effectively. |
| receives from the VMI process. The support of | | | | -to provide priority service, some vendors reserve |
| inventory analysts, e-business analysts and | | | | inventory resulting in shortages to others |
| replenishment planners are very essential for the | | | | -Insufficient level of system integration |
| success of this program. | | | | -High expectations from retailers |
| Agreements In the VMI process, the vendor creates | | | | -Resistance from sales forces Lack of trust and |
| the order and maintains the stocking plan for the | | | | skepticism from employees |
| retailer. Agreements on inventory turns fill rates, | | | | Overcoming the limitations |
| frequency of replenishment and SLAs should be | | | | -Redefining incentive programs based on partnership |
| predetermined. | | | | building instead of sales volume. |
| Data Exchange Two types of data exchange occur | | | | -Building strong partnerships with management |
| between retailer and supplier. One is a one-time | | | | -Conducting simulations and pilots before actual |
| exchange of retailer's sales history that allows the | | | | implementation. |
| supplier to base the inventory. The other is ongoing | | | | -Organising training sessions before launching. |
| product activity data exchange, which primarily | | | | -Setting reasonable targets. |
| contains quantity on-hand, sales volumes, back orders | | | | Establishing agreements on service levels |
| and returns. Product activity data exchange can be | | | | Minimising the risk |
| daily/ weekly depending on the need. | | | | Objectives If the objective of the supplier-proposed |
| Ordering The vendor calculates the reorder point for | | | | VMI programme is simply to insure product availability, |
| each item based on the movement of data. The | | | | this can often be achieved by an agreement to share |
| quantity available with retailer is then compared to | | | | the liability associated with building safety stocks, |
| the calculated reorder quantity at the item/location | | | | better forecasting, or sharing consumption |
| level and order quantities are determined. The | | | | information in a more timely fashion. While some |
| created orders will be communicated to the retailer. | | | | manufacturers' business models may involve 'pulls' |
| Since vendors control the forecasting and fulfillment, | | | | from inventory on a frequency that necessitates |
| even package quantities can be modified to reduce | | | | placing the product in close proximity to the factory, |
| processing at customer receiving facilities. | | | | modern air logistics enables many suppliers to deliver |
| Invoice Once the retailer receives the product, | | | | products to nearly anyplace in the world within 48 |
| invoices are matched and payments will be made to | | | | hours. If factory floor inventory can accommodate |
| the supplier accordingly. VMI does not change the | | | | two days of supply, it is often unnecessary to create |
| ownership of the inventory. | | | | another inventory location near the manufacturing |
| Measurement An effective measurement process | | | | site. |
| should be agreed upon and implemented to monitor | | | | Agreements Before beginning an inventory |
| the success of VMI. This should include | | | | programme, clearly define the roles and responsibilities |
| improvements in inventory turn over, stock | | | | of each party. The frequency of forecasts and other |
| availability, inventory reduction and distribution. | | | | data exchange, service level agreements, how the |
| Benefits of VMI Process | | | | days of supply will be calculated, freshness clauses |
| The VMI process brings benefits for both retailers | | | | and liability must be defined. |
| and suppliers. Some of those benefits are listed | | | | Integration the business processes need to be |
| below. | | | | seamless across organisations. This requires that data |
| To the Retailer | | | | exchanges are frequent and accurate. The |
| Reduced inventory Using the VMI process, the | | | | automation of pull signals, usage, inventory status, |
| supplier is able to control the lead-time component of | | | | advanced shipping notices, receipt confirmations, and |
| order point better than a customer with thousands | | | | forecasts of future demand all need to flow |
| of suppliers they have to deal with. The supplier | | | | between systems. The integration, where possible, |
| takes on a greater responsibility to have the product | | | | should use industry standard methods that can be |
| available when needed, thereby lowering the need | | | | reused with multiple partners.. |
| for safety stock. The supplier reviews the | | | | Connectivity service providers can also play a role in |
| information on a more frequent basis, lowering the | | | | providing connectivity to multiple partners with |
| safety stock component. These factors contribute to | | | | disparate standards until more standardisation is |
| significantly lower inventories. | | | | achieved. Automatic alerts and notifications should be |
| Reduced stock-outs The supplier keeps track of | | | | sent to the appropriate people when situations |
| inventory movement and takes over responsibility of | | | | indicate that human intervention is necessary before |
| product availability resulting in a reduction of stock | | | | potential inventory problems become crises. |
| outs, there-by increasing end-customer satisfaction. | | | | |