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Under vendor managed inventory—VMI—suppliers ac­tually take on the responsibility of managing their in­ventory throughout their customer's supply chain. This can take several forms. The simplest form involves hav­ing the supplier visit the customer's location at certain designated intervals (such as daily or weekly) and resupplying the customers inventory to a predetermined level. This has been common practice with office supplies and in the grocery industry for years.

Another form of VMI includes the downloading of information directly from a customer's cash registers into the supplier's computer system via EDI or the In­ternet for analysis and determination of the specific in­ventory items and quantity to be resupplied. When most people think of VMI, this version comes to mind.

VMI is often coupled with consignment, which is "the process of a supplier placing goods at a customer loca­tion without: receiving payment until after the goods are used or sold."4 When VMI is coupled with consignment, it is imperative that the supplier makes sure that the con­signed inventory moves rapidly through the customer's inventory. Otherwise, the supplier can go bankrupt while the customer is sitting on large amounts of its inventory. Customers are particularly fond of this arrangement be­cause there is no better guarantee of on-time delivery than to have the goods sitting in their facility!

Another variation of VMI calls for the supplier to put one of its employees in a customer's location to actu­ally manage the replenishment of inventory. The Bose corporation has done this for years under a program they call JIT II.5 Under this type of arrangement, the sup­plier monitors the inventory and places orders when needed. In addition, the supplier will participate in strat­egy sessions such as new product introductions and pro­motions in order to coordinate a smooth, reliable supply of product. Obviously, for this type of relationship to be profitable, the two companies must transact a large volume of business.

In establishing a VMI relationship, particularly one in which the supplier will analyze the customer's informa­tion and resupply based on the analysis, several key ele­ments must be in place. The customer must be convinced that the supplier has a high degree of competence when performing the materials management function. After all, would a customer likely agree to let a vendor with a 65 percent service level manage its inventory? A partnering mindset accompanied by an environment of openness between the two parties is crucial. Once a VMI program is established, customers certainly do not want to waste their time putting out competitive bids to make sure the supplier is honestly providing the product at a fair price.

The real key advantage of VMI is to replace the fore­cast—with all its inherent inaccuracies—with hard data. In the article "Integrating Vendor-Managed Inventory into Supply Chain Decision Making," Mary Lou Fox points out several of these advantages of VMI:

1.        Improved customer service. By receiving timely in­
formation directly from cash registers, suppliers can
better respond to customers' inventory needs in terms
of both quantity and location.

2.        Reduced demand uncertainty. By constantly moni­
toring customers' inventory and demand stream, the
number of large, unexpected customer orders will
dwindle, or disappear altogether.

3.        Reduced inventory requirements. By knowing exactly
how much inventory the customer is carrying, a
supplier's own inventory requirements are reduced
since the need for excess stock to buffer against un­
certainty is reduced or eliminated.6

Improved customer service, reduced inventory re­quirements, and reduced demand uncertainty. How many suppliers would dislike that combination? How­ever, reduced reliance on forecasting is only one benefit of VMI. A second and potentially more powerful ben­efit is the binding of the customer to the supplier. Es­tablishing a VMI relationship—particularly one that includes an Internet or EDI interface—takes a great deal of work. Just ensuring the validity of the information traveling between the two different companies is a daunting task. Once the relationship is established, most customers will be very reluctant to endure the amount of work needed to replace one supplier with another.


As the business world moves forward, there will be a greater emphasis in replacing inventory—which is expen­sive—with information, which is not. The sharing of schedules, and implementation of such techniques as VMI, will permit supply chain partners to reduce or eliminate safety stock and other "just in case" invento­ries. Thus, replacing inventory with information will lead to a real competitive advantage!

For balance of this article, click on the below link:

Lean Manufacturing Articles and click on Series 13


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