Making Vendor Managed Inventory Work

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July 21, 2017

Vendor Managed Inventory (VMI) lets suppliers manage re-supply by monitoring customer stock levels and forward demand that optimizes working capital with service levels. This gives suppliers better visibility into forward demand, allowing them to produce, ship, and store more efficiently. As a result, customers have a smooth supply of product delivered at the right time and do not have to worry about stock-outs.

Gary Neights, senior director, product management, Elemica, offers these tips to better manage VMI relationships.

1. Trust and collaborate. Don't view VMI as cost shifting from customer to supplier but as collaboration between customer and supplier. The supplier manages order processing, working capital, transportation, and storage based on the customer supplying accurate and timely inventory, material movement, and demand information.

2. Agree on objectives. Determine goals upfront. Is the joint objective to add operational and working capital efficiency to a mature, stable process via VMI? Or is the objective to improve effectiveness of a process by tackling specific pain points?

3. Ensure accurate inventory. It's best to use a real-time, automated physical measure of inventory, such as telemetry. If inventory accuracy is consistently high, you can leverage an inventory record feed from the ERP. Manual physical counts are also an option.

4. Let business rules and parameters govern the process. Minimum safety stocks, demand-variable safety stocks, lead times, manufacturing, and shipping calendars help ensure you achieve service levels and manage risk.

5. Synchronize data. Does the supplier use pounds while the buyer uses kilos or drums?

6. ReIntegrate orders. A VMI tool should automate the integration and cross-referencing of data inputs; apply algorithms, business rules, calendars, and lead times; and generate orders. The orders should automatically post to the supplier's order processing system.

7. Stay flexible. The VMI tool should accommodate changes in demand or transportation status. For example, a late delivery should be signaled to the system so that it can adjust.

8. Determine if demand uncertainty indicates the need for multi-echelon VMI. This enables the direct capture of demand data from end customers, allowing intermediate storage facilities to replenish more accurately. The predictive power of this application is that it smooths out demand variation and supports economic order quantities while considering customers' individual demand profiles.

9. Compare automated VMI tools to manual VMI. Automated business process tools that utilize exception-based alerting to proactively manage the process enable you to eliminate errors, stock-outs, and emergency shipments. By automating the process, you can roll out standardized enterprise-wide VMI processes and inventory management controls, and scale your operation.

10. Consider the human element. While VMI may have a large and positive impact, customer service, procurement, supply chain, and sales need to be involved. Some individuals may resist deployment because they don't undertand VMI's goals. That's why you need proactive change management and project management.