Knowledge Zone - Operations



Demystifying VMI: Vendor Managed Inventory

- by Sarang Aparajit *

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Part - II

Another concept, which appears during the VMI agreement regarding the replenishment decisions, is the Consignment inventory (CI), which needs to be specified. The Consignment inventory (CI) is the philosophy whereby the customer will not be invoiced right at shipment, but the invoicing will be done only after selling the goods to its end consumer. Whether part of VMI or not, CI thus leaves ownership of the products shipped with the vendor, until the customer sells those items. Hence, the consignment inventory is not viewed as an asset on the customer's record, thus resulted in to a higher inventory turnover ratio.

In a nutshell Vendor Managed Inventory is the process by which the inventory of the products are managed by vendor in its distribution center. The vendor gathers stock information from the customer and then does his calculations regarding what should be transported to maintain adequate inventory levels at the retailer's premises. The purchase order generation process is also done by the vendor. The vendor generates the purchase order to replenish the customer's inventory.

Objectives of VMI

  1. The main objective of VMI is to give manufacturer an access to point of sales (POS) information to set off replenishment closer to actual point of sale which can result in increase in sales.

  2. The other objective of VMI is to provide manufacturer a demand centric view of replenishment & production planning.

  3. To give visibility to customer demand upstream to facilitate better Supply Chain planning which will result in improved customer service.

  4. VMI should help an organization, which aims at keeping inventory levels as well as the inventory carrying cost as low as possible throughout the supply chain, which will result in to increased gross margins.

  5. VMI focuses on assuring that products are replenished to stock in the most efficient way, With manual system this process is very difficult instead VMI uses automatic electronic messages to keep track of the current stock situation and planned sales forecasts, so that the replenishment can be carried out on time which will facilitate to avoid the stock outs so that the overall inventory in the entire supply chain can be minimized.

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* Contributed by -
Sarang Aparajit,
PGDIE Class of 2005,
NITIE, Mumbai.