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20. 5. 2010 Seda Aksoy | Project 2| VENDOR MANAGED INVENTORY (vm? )| CONTEXT 1. What is Vendor Managed Inventory (VMI) 2. Advantages and Disadvantaged of VMI 3. Types of starting-up a VMI Program 4. Six Steps to a Successful VMI System 5. Usage of VMI Applications 6. How to make VMI Work 1. WHAT IS VENDOR MANAGED INVENTORY Vendor Managend Inventory (VMI) is a supply chain practise where the inventory is monitored, planned and managed by the vendor on behalf of the consuming organization, based on the expected demand and on previously agreed minimum and maximum inventory levels.

Traditionally, success in supply chain management derives from understanding and managing the tradeoff between inventory cost and service level. VMI projects can result in improvements along both dimensions. At least 2 forms can be distinguished : 1. A wholesaler (distributor) manages inventory levels for a retailer. VMI in this context is also called Efficient Consumer Response (ECR). Note that the retailer still owns the incentory, even though the replenishment order is triggered by the wholesaler. 2.

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A manufacturer manages invemtory levels for a distributor. Note that the distributor stil owns the inventory, even though the replenishment order is triggered by the manufacturer. VMI is based on the belief that suppliying parties are in a better position to manage inventory as they have better knowledge of the goods production capacities and lead times. Also it is based on the belief that allowing vendors to manage inventory reduces the number of layers in the supply chain, increasing stock visibility and reducing overall inventory levels.

To enable VMI, sales data must be provided to the vendor via Electronic Data Interchange ( EDI), other electronic means, or via traditional human agents at outlets. Other terms for VMI are Continuous Replenishment and Supplier Managed Inventory . Origin of Vendor Managed Inventory (History) VMI started in the retail business and grew out of Efficient Consumer Response (ECR), where consumer satisfaction or rather consumer expectation of stock availability is an important way to have a competitive edge over others. Wal-Mart is one of the successful pioneers of this supply chain strategy.

VMI is now gradually progressing towards strategic-partnership based forms. This influences the way companies plan their inventory, evolving to Collaborative Planning, Forecasting and Replenishment (CPFR). 2. ADVANTAGAES and DISADVANTAGES of VMI Advantages Supply Chain Level: * Lower inventory levels at total supply chain level * Less overhead * Increases sales * Reduces human data entry errors Vendors: * Better insight in customer demand (better resources usage, reduce raw or finished goods inventories) * Improved, more direct communication with customers. Improved market analysis * Increases sales via lower out of stock rates Opportunity to provide category management and other value-added services Suppliers : * Reduced replenishment times and lower inventory costs * Increased sales through reduced stock outs * Less redundancy * Built strategic strenghts through establishing strong supply chain relationships * Vendor assistance with category management End-users: * Increased service level * Reduced stock outs. Limitations , Disadvantages * Success of VMI initiative depends on the strength of the relationship between the vendors and retailers * Increased dependency between the parties and increased switching costs Lack of trust to exchange data can result in the ineffective implementation in one or more of the following forms : * Inventory invisibility * Inventory imbalance * Costs of technology and changing organization * Extensive data -and EDI testing is needed * Loss of necessary shelf space at the selling paty may result in less attention by buyers, compared to competitors that are not into VMI yet * Special promotions or events need to be communicated beforehand to avoid replenishment planning mistakes (loss of flexibility) * Increased vulnerability for non-foreseenable risks such ass employee strikes, hurricanes, etc. ue to lower inventory levels * Most of the benefits are for the end client and for the selling part, while the vendor does much of the work 3. TYPES of STARTING-UP a VMI 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 that have built their own systems eventually decide to go with a Pre-packaged System. 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. Here there is an example application which IKEA uses for its own inventory management systems. IKEA uses its own software. 4. SIX STEPS to a SUCCESSFUL VMI SYSTEM 1. COMMUNICATE expectations of all parties 2. Customer must commit to sharing PRECISE informantion 3. Supplier must ensure RELIABLE transmission, receipt, and use of informantion 4. Sufficiently TEST systems before going live 5. Expect implementation to be PROCESS not a Project 6.

Plan to spend sufficient TIME and MONEY to make it work 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. . 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 took 2-2. 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. 5. USAGE OF VENDOR MANAGED INVENTORY APPLICATIONS * Error sensitive industries. Example: Pharmaceutical Sector. * Multiple outlets, fast-moving consumer goods. Example: Wal-Mart * Perishable goods. Example: K Mart * Valuable and unpredictable components. Example: PC manufacturing. * Strong competition (small margins). Example : Automotive. Conditions:

VMI is usually successful for industries and organizations with following characteristics * Multiple outlets, because this increases the benefits compared to traditional inventory management. * Severe consequences in case of human errors (Pharmaceutical) * Industries with steady and high volumes (Retail, Consumer products) * Industries with high-value inventory and a high level of demand unpredictability (High Tech) * Management with strong leadership capability to form strategic long term partnerships (Automative) 6. HOW TO MAKE VMI WORK Common Mistakes

Unexpected demand changes by the customer need to be shared with the supplier. Changes in demand could result from the customer acquiring a new, large customer opening of a great deal of stores in a short period; or offering special promotions that create spikes in demand. The supplier may be unable to schedule production or shipment in a timely manner, causing a drop in inventory available for the customer to sell in the event of a foreseen increase in demand. A spike in demand could also create a burden on the supplier, who will have to reprioritize its production plan or inventory from one customer to another.

Likewise, if the supplier is experiencing a significant spike in demand from a major customer, it may be wise to let the VMI customer, and other customers as well, know that the supplier will have very little flexibilty over a certain period of time, so that everyone can adjust accordingly. The most common cause of VMI failure revolves around communication breakdowns. All of these problems in implementing a VMI program can be significantly diminished if they are adequately addressed at the beginning of discussions.

Hence, there should be several in-depth meetings upfront to avoid problems down the road. Developments VMI is a stepping-stone toward an emerging process, Jointly Managed Inventory. In Jointly Managed Inventory a partnership between the supplier and customer is formed. This solidifies the current VMI relationship. Jointly Managed Inventory (JMI) is a much more detailed extension of VMI but the goals and premise are quite similar. It takes the foundation from which the relationship has already been built and fine-tunes it.

This partnership involves increased tactical planning between the supplier and customer when developing JMI. This should include, but is not limited to, the customer integrating the supplier into the customer’s point-of-sales (POS) system, for example. This integration allows the supplier to gain insight into real-time sales data to further improve the replenishing function while being able to better plan its own production/distribution system to meet the customer’s needs. Proceeding to this step will further solidify the relationship and produce a favorable outcome for each party.

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