Term Paper: Vendor Managed Inventory Supply Chain

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[. . .] It requires all the co-operating parties to use similar protocols and common product numbering. This has slowed down the adoption of VMI, especially in the grocery sector, where large SKU numbers and frequent transactions make implementing VMI more demanding." (Riikka Kaipia and Kari Tanskanen, Department of Industrial Management Helsinki University of Technology, 1995)


VMI is thus a new supply chain management system, which can improve supply efficiency provided it, is able to get rid of the implementation challenges. A typical VMI system is not very complicated in nature or that is what appears to be the case on the surface. But the actual implementation and operation of VMI can sometimes prove problematic because of the complexity of the data interchange involved. Usually, the most important technology used for VMI is EDI or electronic data interchange. This is an ordering system, which enables suppliers to download inventory files from the distributor's computers. After carefully studying inventory data, supplier places an order for the required products or makes other kinds of adjustments. The order notification is sent to the distributor who acknowledges it and the order is then shipped on a given date. After the order has been received, payments can be made through electronic bank transfer. This is the way a typical VMI system works and most companies use specialized software to interact with remote computers. In some large supply chains where several intermediaries are involved, suppliers can provide additional services of forecasting, sales planning and product replenishment. Though technology plays a very important role in VMI system today, it was originally manual which was why it took most large companies a long time to understand or adopt this model. The article titled 'Vendor Managed Inventory' which appeared in ComputerWorld's August 1999 issue sheds light on the transition of VMI from manual to automation. Author Jacqueline Emigh (1999) has this to write about this transition:

For several decades, route salesmen for food manufacturers have taken inventory when they visit stores to stock the grocery shelves, says Tim Van Mieghem, president of The Proaction Group, a consultancy in Chicago. Makers of hospital supplies became similarly inspired, employing in-hospital attendants to count and replenish items. Department stores like Wal-Mart moved to automated VMI in the late 1980s. One of the driving factors was the difficult task of predicting how much seasonal apparel was needed, says Bob Copeland, senior manager at Atlanta-based Kurt Salmon Associates, a consulting firm in the retail arena. The apparel industry has continued to be a pioneer in VMI ever since. For example, Greensboro, N.C.-based VF Corp., maker of brands like Lee and Jantzen, has been implementing a sophisticated system that integrates retail inventory data from VMI into floor-space management at the store level. In a beta test, ShopKo Stores Inc. In Green Bay, Wis., reportedly experienced a gain of more than 20% in sales of men's jeans. Ironically, though, industries facing complex situations have been among the last to adopt automated VMI." (Computerworld, August 1999)


Now that we understand what VMI and its key features are, we are in a better position to study its advantages and disadvantages. The biggest advantage is reduction in costs for both the supplier and the buyer. Most buyers in traditional setting choose to purchase items at the beginning of the month but let inventory size decrease by the end. They however fail to realize that lesser items in inventory can significantly hurt customer service. Due to unpredictable changes in demand for various items, there are various ways in which costs can increased in traditional management systems. For example when demand for a certain item increases, there is a chance that buyers would stock up that product in larger than required quantities. This can often lead to costs increase, as buyers are unable to sell all the items within a given period. Similarly sometimes distributors place orders for items, which are not as much in demand as the buyer has assumed. This can result in cost increase, which can seriously hurt supply chain efficiency and can also prove detrimental to customer service.

To remove these problems, vendor managed inventory system is implemented. This offers both suppliers and buyers with a chance to reduce costs and increase sales. For example, suppliers can increase the frequency of orders keeping in view the demand changes, and this leads to lesser costs and more revenues. On the other hand buyers can leave order issues to the supplier and expect appropriate quantities of required items in the inventory at all times. Suppliers are in a better position to judge demand of products and can thus change the frequency of orders placed on the buyer's behalf.

Matt Waller et al. (2001) focus on the advantages of VMI and maintain that this system, if properly implemented, can help both the buyers and the sellers in cost reduction. In their research paper on this system, which appeared in the Journal of Business Logistics, Waller and others had this to say about the why VMI could attract the buyers:

Buyers are attracted because VMI resolves the dilemma of conflicting performance measures. End-of-month inventory level for example, is a key performance measure for retail buyers, but customer service level (tracked by some sort of out-of -stock measure) is also applied. These measures are contradictory. Buyers stock up at the beginning of the month to ensure high levels of customer service, then let inventory drop at the end of the month to "meet" their inventory goals (disregarding the effect on service level measures) The adverse effect is even more pronounced when end-of -quarter incentives are tied to financial reporting. The combined result of this behavior is a monthly order spike to the supplier." (Journal of Business Logistics, 2001)

But buyers are certainly not the only ones who benefit from VMI, suppliers also stand to benefit from this system, which is one reason, why choose to render this service. Cost reduction also occurs at supplier's side and this is proved by another scholarly resource. In other words, VMI is implemented only when both parties agree on a win-win strategy where the supplier can benefit as much from the service as the buyer. For successful implementation of VMI, it is thus important for the two parties to understand how they can stand to benefit from this system or else VMI would lose its effectiveness. In a paper published by Riikka Kaipia and Kari Tanskanen, the writers explained how this system could help reduce costs for the suppliers. They maintained that a better and more harmonious collaboration between the supplier and their customers could remove friction that usually mars most supply chain business relationships. Riikka Kaipia and Kari Tanskanen write:

For suppliers, the major attraction of VMI is in mitigating demand. Large, infrequent orders from customers force suppliers to maintain inventories that enable them to respond to the uneven demand. In VMI, the supplier is able to smooth the peaks and valleys in the flow of goods, and therefore to keep smaller buffers of capacity and inventory. The supplier has better opportunities to co-ordinate the shipments to different customers. It can schedule - either postpone or advance - shipments according to production schedules, customer inventory situations and transportation capacity. Usually in VMI the frequency of shipments is increased... Buyers need not monitor the supplier performance by the service level provided by the supplier to the buyer. The only meaningful service level is from the retailer to its customers. The supplier's performance is measured by this service level and by the inventory level at the retailer. Due to the supplier's abilities to plan operations better and due to more frequent deliveries, the service level improves. This generates more sales, because product availability increases." (Riikka Kaipia and Kari Tanskanen Department of Industrial Management Helsinki University of Technology, 1996)


VMI system is not very easy to implement and this is the reason why its transition from manual to automation resulted in decrease of its popularity. It is important to understand here that though technology has made it easier to pull down data from remote computers, it has nonetheless made implementation a problem. This is because as we discussed above, VMI requires similar formats and software at both ends. A difference in the software or EDI systems can result in data interchange issues that affect the speed of operations. Another problem is the number of customers that a supplier might have and the technology adopted by each. IN most cases it is impossible for supplier to benefit from cost-reduction features of VMI if it has only one customer. Therefore, he would most probably be supplying his services to numerous customers, each one of whom has different needs and different technical facilities available. Therefore implementation of this system can often present various tough challenges to suppliers as well as customers.

Customization of VMI system often seems like the… [END OF PREVIEW]

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