Vendor Managed Inventory

 | April 09,2010 04:40 pm IST

Vendor Managed Inventory is an approach to inventory and order fulfilment whereby the supplier, not the customer, is responsible for managing and replenishing inventory. This appears at first sight to counter the principle of pull scheduling, because the preceding process (the manufacturer) is deciding how many and when to send to the next process (the retailer).


In practice, the basis on which decisions will be made is agreed with the retailer beforehand, and is based on the retailer's sales information. Under VMI, the supplier assumes responsibility for monitoring sales and inventory, and uses this information to trigger replenishment orders. In effect, suppliers take over the task of stock replenishments. VMI can relieve the customer of much of the expense of ordering and stocking low-value Maintenance and Replacement Policies (MRO) items.


Automated VMI originated in the late 1980s with department stores in the USA as a solution to manage the difficulties in predicting demand for seasonal clothing. Prior to this manual VMI had been around for many years, particularly in the food industry. Under manual VMI, the manufacturer's salesman took a record of inventory levels and re-ordered product for delivery to the customer's store, where the manufacturer's representative would re-stock the shelves. As product variety has increased and life cycles have shortened, manual VMI has been replaced by automated VMI.


Vendor Managed Inventory is a Just-In-Time technique in which inventory replacement decisions are centralized with upstream manufactures or distributors. Acronyms for VMI include: -

  • Continuous Replenishment Programs (CRP)
  • Supplier Assisted Inventory Management (SAIM)
  • Supplier Assisted Inventory Replenishment (SAIR)
  • Efficient Consumer Response (ECR)


VMI may also be considered as an extension of Distribution Replenishments Planning (DRP).


Implenentation of VMI

A simple model of VMI is shown in the following figure: -




The model is based on the assumption that the customer has entered into a collaborative or partnership agreement with a distributor under which the latter agrees to stock a specified range of items and meet specified service levels. In return the customer undertakes to buy the specified items solely from the distributor and no longer keeps the item in stock. There must, therefore, be a high level of trust between the customer and the distributor.


The various steps in figure may be explained as follows: -

Step 1. The customer sends information on items sold to the distributor. This information may be collected by bar-coding and scanning technology and transmitted to the distributor by Electronic Data Interchange (EDI) or the Internet.


Step 2. The distributor processes the information and forwards the acknowledgement to the customer giving details of the quantities and descriptions of the products to be delivered, the delivery date and destination, and releases the goods.


Step 3. The distributor collects detail of all customer order which are consolidated and sent daily to the manufacturers via EDI or the Internet.


Step 4. The manufacturers replenish the distributor's stock.


Step 5. The distributor invoices the customer who remits payment. Very large customers may transmit their requirements directly to the manufacturers from whom they receive direct deliveries.


Normally, VMI implementation involves four stages: -


  • Preparation: In addition to initial negotiations between customer and supplier and setting up project teams with clearly defined roles and responsibilities, this stage involves Collaborative Planning, Forecasting and Replenishment (CPFR), the aim of which is to minimise inventories and focus on value-added process activities. By focusing on the flow of supply to consumers without the complication of inventory, the project participants can often discover and eliminate previously undetected bottlenecks in the flow.


  • Pre-implementation: This is an extension of CPFR involving the determination of forecast quantities, safety stocks, lead time, services levels, key performance indicators and ownerships issues Implementation.


  • Refinement: Improvements that may be made in the light of experience including the resolution of technical difficulties encountered subsequent to implementation.