Vendor-managed inventory (VMI) is experiencing resurgence in popularity, offering companies an edge to their supply chain management (SCM) endeavours.
In a time where customer loyalty is a luxury, rather than a given, VMI might just be the solution suppliers need to breed confidence and efficiency within their customer-base.
One of VMI`s key benefits is that it shifts replenishment responsibilities from the customer to the supplier. Under VMI, instead of the customer monitoring its sales and inventory for the purpose of triggering replenishment orders, the vendor assumes responsibility for these activities.
In the past, many suppliers operated vendor-stocking programmes where a representative visited a customer a few times a month - or when the need arises - and restocked their supplies to agreed-upon levels.
VMI replaces these visits, automating the ordering of goods - replenishing stocks and adhering to customer demands in real-time or near real-time.
Once a VMI system is established with all suppliers, a company can effectively outsource its material management to its supplier. The downside is that customers will no longer have the resources to perform this role in-house - making them more dependent on the supplier.
The upside is that VMI has the potential to improve sales and drive down lead times.
Traditionally, most manufacturing and distribution operations determine what to sell and how to sell by way of forecasts. Indeed, countless hours are spent developing, massaging and tweaking forecasts.
The problem is that realistically a forecast is nothing more than an estimate of future demands. However, under VMI, instead of supplier forecasting what customers will buy - which usually entails a lot of guesswork - it now works with real sales and inventory data.
Also, suppliers will find they can soon provide input into timing of promotions and safety stock strategies. This reduction in demand uncertainty, therefore, enables supplier to operate at higher service levels with lower inventories.
However, it is also important that in order for a VMI to work, that both the supplier and the customer must have a certain level of business maturity and technical sophistication.
In saying this, VMI isn`t simply a technology project but a business development project that requires restructuring processes and change in employee functions.
VMI offers three critical benefits to suppliers as well as customers:
* Improved customer service - by receiving timely information, suppliers can better respond to customers` inventory needs in terms of both quantity and location;
* Reduced demand uncertainty - the number of large, unexpected customer orders will dwindle as suppliers are now able to constantly monitor customers` inventory and demand streams; and
* Improved customer retention - once a VMI system is developed and installed, customer/supplier partnerships aren`t only encouraged, they are cemented.
VMI has the potential to benefit both suppliers and customers, but must be approached with the correct principles in place - it still remains a business issue.
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