Vendor Managed Inventories (VMI)

Normally, it is the customer who is responsible for defining inventory control parameters for purchased products and providing the supplier with purchase orders. However, in a Vendor Managed Inventories concept, the responsibility of replenishing stock becomes the supplier’s responsibility, according to agreed stock targets and service level agreements.

What benefits can be achieved with Vendor Managed Inventories?

The most obvious benefit of VMI is that the customer can reduce their stock by increasing stock turnover and reducing safety stocks. VMI also has a positive influence on tied-up capital, as well as storage costs. Additional achievable benefits include, reduced administration when it comes to inventory management and supply monitoring, as well as better inventory availability. One disadvantage may be the creation of a lock-in effect toward a particular supplier, but this disadvantage is conversely an advantage for the supplier. Other benefits to the supplier can include, better information about a customer’s actual consumption, easier production planning, more even capacity utilization and last, but not least, increased customer satisfaction.

Prerequisites for VMI (Vendor Managed Inventories)

The first thing you should do when considering VMI is to reflect on which purchased items are suitable for the introduction of VMI. It is suggested you start with items that have a low value and a high picking frequency. The reason is because these articles are relatively easy to manage (high and even demand) and will have little impact on total sales. If the introduction of VMI does not go as planned, it will be comforting to know that finances are not seriously affected. A two-dimensional ABC classification of value and picking frequency can be an easy way to identify these types of items, i.e. the CA articles. Once you have this type of VMI-concept working, it is easier (with the newly acquired experience) to introduce the concept into more difficult to manage and financially critical articles. The choice of suppliers is, of course, also important in ensuring that the introduction will be successful.

In order for a VMI-concept to work, clear and common stock targets, as well as service level agreements between the customer and supplier must be in place. Key performance indicators for monitoring and a regulatory framework for possible adverse deviations from targets should also be clearly defined. A description of the calculation basis for stock replenishment should also be included. Agreements for how invoicing should be handled also needs to be established. With Vendor Managed Inventories, it is easier to pay only for actual consumption.

What basic data is needed?

The VMI concept is built upon the idea that data from the customer's business software will be made available to the supplier on a daily basis. Collected customer data is then compiled with the data from the supplier's business in a system intended for the VMI purpose. Relying on Excel-based solutions for this is not something that Optilon recommends. In many cases, EDI (Electronic Data Interchange) is utilized for this communication. Below are some of the key elements that must be in place:

Specification of EDI format for data transfer
Effected items
Translation Table for items (customer item, article, EAN code, ITF product code, etc.)
Available transport options from the supplier’s warehouse to the customer's (e.g. "7, 9, 19, 33 or 38" pallets)
Stock targets and service level agreement (e.g. service of 99.5% with a maximum of 14 days' storage)
Customer's calendar for goods reception.

For more information on Vendor Managed Inventories contact Magnus Edberg, Sales Manager at Optilon:
Ph: +46 (0)709-379281
E-mail: magnus.edberg@optilon.se

Vendor Managed Inventories is one of Optilon many solutions in Supply Chain Management.