Vendor Managed Inventory

last updated Thursday, January 16, 2020
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John Burson

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CONTENTS

Some firms have successfully improved their supply chain performance by implementing an approach known as Vendor Managed Inventory (VMI). With VMI, the vendor specifies delivery quantities sent to customers through the distribution channel using data obtained from EDI. Vendor Managed Inventory, Just-in-Time Distribution (JITD), and Efficient Consumer Response (ECR) all refer to similar concepts, but applied to different industries. For example, the grocery and apparel industries tend to use ECR, whereas the automobile industry tends to use VMI and JITD.

The Vendor Managed Inventory Approach

VMI reduces stock-outs and reduces inventory in the supply chain. Some features of VMI include:

• Shortening of the supply chain

• Centralized forecasting

• Frequent communication of inventory, stock-outs, and planned promotions. Electronic Data Interchange (EDI) linkages facilitate this communication.

• No manufacturer promotions

• Trucks are filled in a prioritized order. For example, items that are expected to stock out have top priority, then items that are furthest below targeted stock levels, then advance shipments of promotional items (promotions allowed only in transition phase), and finally, items that are least above targeted stock levels.

• Relationship with downstream distribution channels

• Result: Inventory reduction and stock-out reduction

VMI Implementation Challenges

VMI can be made to work, but the problem is not just one of logistics. VMI often encounters resistance from the sales force and distributors. At issue are roles and skills, trust, and power shifts. Some of the sales force concerns are:

• Loss of control

• Effect on compensation - incentive bonuses may depend on how much is sold, but sales force has less influence under VMI.

• Possible loss of job

• Skepticism that it will function well - technical problems

• Concern that reduced inventory will result in less shelf space and therefore loss of market share. This concern can be addressed by filling the shelf space with other stock keeping units from the same vendor.

Distributors also may have concerns about vendor managed inventory, including:

• Inventory will be pushed on them

• No more promotions, discounts, and forward buying

• With less inventory, more risk of disruptions due to strikes, adverse weather, etc.

• The vendor enjoys the benefits while the distributor gives up its only lever of power - data on what the retailers want.

• Danger of being replaced - vendor may decide to forward integrate.

Addressing Concerns

For a VMI system to work, the concerns of distributors and the sales force must be addressed. They can be at least partially addressed by the following:

• Transform the sales role into one of marketing. For example, bonuses can be given based on the number of new clients.

• Distributor skepticism can be addressed by implementing a pilot program with vendor-owned warehouses in order to demonstrate that the system works. Introduce system in distributor-owned warehouses on a pilot basis.

• Engage a neutral consultant in meetings among the vendor, distributor, and sales force.

• Allow some manufacturer promotions in the transition.

• Extensively simulate the system off-line before implementing.

• Don't exaggerate the benefits of VMI; otherwise, any delay in realizing the benefits may cause the supply chain to lose faith in the system.

 
 
 

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