Vendor Managed Inventories

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20.5.2010
Seda Aksoy |

Project 2| VENDOR MANAGED INVENTORY (vmı)|

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. 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...
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