Vendor-Managed Inventory Implementation Considerations. It's Not a Panacea...

posted: > 10 days ago
Source: The Vendor Management Office

Here's a short white paper on vendor-managed inventory implementations I recently drafted and that I'm finally getting around to posting.  Happy reading! Vendor-Managed Inventory Implementation Considerations.  It's Not a Panacea... A vendor-managed inventory (VMI) is an inventory replenishment arrangement whereby the vendor monitors and manages the retailer's inventory—the vendor receives demand information electronically and then replenishes inventory based on, among other things, mutually agreed upon objectives for inventory levels, fill rates, and transaction costs.  The goal of VMI is to streamline supply chain operations for both vendor and retailer, as well as to reduce costs, time, and working capital, by moving the responsibility of inventory servicing and related decision-making further up the supply chain, i.e., to the vendor. The benefits of VMI are clearly significant, as illustrated in a recent two-year study of VMI implementations conducted by Datalliance which included 65 location relationships spread across 12 distributors representing over 20,000 stock keeping units.  Over the two years, the study found that sales improved 47%, inventory turns increased by 38%, and stock-outs were reduced by 45%. While VMIs were relatively new in practice during the mid- to late-1990s, many organizations jumped on the VMI band-wagon as a blanket panacea for their inventory management woes.  As time has progressed, inventory management professionals have come to realize that VMIs should be considered as a part of a tailored—and systematic—approach to inventory management. VMI Implementation Considerations The first threshold in considering VMI is whether or not VMI is even available as a supply chain strategy.  In many cases, vendors will only consider VMI for its higher-volume retailers.  The rationale is that while costs are reduced as a result of VMI, margins are reduced as well and VMI therefore can only be justified based on high-volume.  Once that threshold is met, subsequent implementation considerations typically center on three fundamental considerations: focus, trust, and patience. Focus The first consideration, and perhaps it is almost an admonition, is that a VMI implementation requires and involves significant focus.  Not all commodities are necessarily appropriate for VMI.  For example, if demand for a particular commodity cannot be forecasted with any greater of a degree of accuracy by the vendor than the retailer, the benefits of VMI are diminished.  Another aspect of focus is whether or not the vendor can adequately support a VMI implementation.  Thus, VMI implementations should be confined to those commodities that make sense, such as high-volume / low-variation commodities, and where the vendors of those commodities are sophisticated enough in their own supply chain practices to support VMI. Trust Another critical consideration for a successful VMI implementation is trust.  Buyers new to VMI sometimes distrust the effectiveness of VMI programs, and, fearful of stock-outs, become overly involved in monitoring the program—ultimately resulting in the program’s failure.  To this end, mutually-agreed upon contractual commitments are a critical basis for a trusting business relationship.  Generally speaking, such contractual commitments in the context of VMI should include commodities to be managed, locations to be managed, maximum and minimum inventory levels, frequency of replenishment, service level objectives with associated liquidated damages, and procedures for administrative activities such as determining demand forecasts, handling returns, and invoice processing. Patience A VMI implementation can be complex, initially fraught with missteps, and require collaboration that is atypical between vendors and retailers: the vendor / retailer relationship must be fostered, trust built, processes and procedures developed, information systems integrated, and myriad other activities accomplished.  All of these activities take time and do not even consider all of the various implementation problems that are likely to occur.  Thus, patience from both vendor and retailer is demanded by the long-term effort that is inherent to VMI implementations.  Even beyond the phase of implementation, patience is required in terms of results expectations.  While articles and white papers describing dramatic VMI successes—predominately from consultants who implement VMI solutions—abound on the Internet, more scholarly and pragmatic articles require somewhat more diligence to research.  In reviewing these more realistic perspectives, it becomes clear that the beneficial results from a VMI implementation take time and effort…and require patience from all involved stakeholders. Conclusion While this note is by no means complete in a thorough discussion of VMI—nor was it intended to be—the t...