Vendor Managed Inventory (VMI) - One Popular Practice for Collaborative Inventory Managment

This post serves as a brief introduction for the Vendor Managed Inventory (VMI), which is one popular practice for the collaborative inventory management. VMI has been implemented across several industries, including fast-consuming-good, apparel, and even medical equipment. The post includes the VMI's process, benefits, successful factors, and its usual failure reasons.


Modern corporation mainly uses two way to improve their inventory management. First, they integrate the inventory management with their transportation, warehousing and other traditional logistics decisions; second, they implements a collaborative inventory management plan with its external stakeholder (supplier and customers).

Vendor Managed Inventory (VMI) is one example of the collaborative inventory management practice. The idea of VMI is simple. In a supply chain without VMI, the retailers purchase products from the manufacturers, and then sell them to the customers. VMI means that the manufacturers send the finished good to the retailers, and the retailers managers the inventory for the manufacturers. The manufacturer own the product until they are sold to the end customers. The manufacturers and the retailers will reach an agreement on the maximal and minimal inventory level. The manufacturers are responsible for maintaining the inventory level between these range.

The main benefit of the VMI is that it greatly reduces the bullwhip effect. The bullwhip effect occurs because all the members in the supply chain make the demand forecast independently without sharing their information. If the manufacturer and the retail implement the VMI, the manufacturer could know the demand of the end customers in real-time, instead of predicting the end users demand by using the purchase data from the retailer. There are also several indirectly benefit for the VMI. As a manufacturer, a company should reduce the storage cost because part of its product could be directly send to the customers right after they are finished. As a retailer, it could release some cash from inventory because it pays the manufacturer after the products are sold. And it could reduce the labor cost because it doesn't require its employees to place order.

I scanned through some articles about the VMI implementation, and I think there are three key successful factors for it - consensus, information technology, and decision model.

• First, the companies implementing the VMI should reach a consensus on what it could accomplish and what is the responsibilities of each one. Everyone should be 100% behind the VMI implementation. VMI is not a "marketing tool" for the manufacturer to attract its target customers; it's a long-term collaborative relationship between the company and its strategy partner.
• Second, information technology is needed for timely data sharing. The benefit of the VMI is built on the fact that all members on the supply chain share the same information. Information technology should implement to help retailer and manufacturer to track the products order and inventory level in real-time.
  
  Another consideration is that the information system should be designed in a manner to ensure the system could be easily upgraded in the future. In the VMI case study for Bayer, a chemical and health case company in Germany, the company identify its business process and divided the technology-related process into several well-defined groups: data acquisition, data transmission, data pre-processing and storage, and data presentation. It means that the company could upgrade their technology separately for these different group instead of replacing the whole system. [1]
• Third, the decision model is significant for the implementation of the VMI. The decision model refers to how the company decide when the product should be sent and how much of the product should be sent. The VMI provided more information for the company the forecast the demand but it doesn't provide a decision model for the company to make the decision. Fortunately, for many industries like fast-consuming good, apparel,  there are lots of academic paper that describe how to take advantage of the data under the VMI mode. 

Many businessmen are fascinated by those fancy acronym, like ERP, CRM or VMI, and don't really think about whether it's actually helpful for their business.  Even though VMI has been proven successful for many companies, like Wal-Mart, it doesn't necessarily apply to any company.

Even though a manufacturer has decided to implement the VMI, it doesn't need to establish these relationship with all its clients. If a certain client purchases products very infrequently, and purchase only a small amount each time, the effort of implementing the VMI will probably overkill the benefit.

For companies who could potential benefit from the VMI, they will still encounter lots of problem when implementing it. We could discuss these problems based on the three successful factors mentioned previously.

The first problem is that the benefits of the VMI are not properly allocated to all the partners. For example, the manufacturers own the products until they are sold and therefore the manufacturers are undertaking more risks. To balance the cost, the retailers should pay the manufacturers immediately after the product are sold. However, some large, dominant retailers, like Wal-Mart have strong control over their suppliers. If they want, they could postpone these payment time. If they do so, it maybe cause some dissatisfaction and make all the VMI participant hard to reach an consensus.

Another problem comes from the technologies side. If the retailers adopt a technology that can't provide accurate and timely data, they could benefit from the VMI. They should adjust their business process to align with the technology. In addition, since the budget and recourse varies from companies to companies, a company should consider whether they are using a too complicated system and as a result, its partners has to make lots of investment which they could hardly afford.

Three problem may be resulted from a poor decision model. For example, the companies may set up a too-low maximal and minimal inventory inventory level. In this case, the manufacturers have to adjust the inventory very frequently and each time a small amount (which means high transportation cost).

The following are a few questions I have been thinking about:
1. Image you are a manufacturer or retailer, how will you persuade your customers or supplier to participate the VMI if you believe it's beneficial.
2. In the post, we've been discussed how the VMI could be implemented between two companies. However, is there any difference if it's implemented in the longer supply chain. For example, the supply chain includes raw material supplier, product manufacturer, distributor, and retailer.
3. What is other alternative for collaborative inventory management? Or if a company has successfully implemented the VMI, what's the next step to further the collaborative level? (Something like joint managed inventory)


[1] http://www.opto22.com/documents/casestudies/1369_Case_Study_ATPlan_Bayer.pdf