Vendor managed inventory (VMI) is traditionally the mechanism for balancing inventory at the store or distribution level of the supply chain in order to balance risk between supplier and distributor/retailer and to negate the “bull whip” effect of inventory management.
The idea behind managing inventory as close to consumer demand as possible, is that consumption models are consistent and predictable overall, but as stock control and forecasting moves further upstream it becomes more inconsistent and confused.
Electronic data interchange (EDI) is often used by larger retailers and their supply chain in order to facilitate the model, either direct with manufacturers or via logistics companies.
Although VMI might put retailers or distributors at an advantage in terms of meeting consumer demand at source, the downside might be in terms of having the storage space required to accommodate this inventory model. As VMI evolved, a greater downside for suppliers was that they were primarily responsible for holding stock and any shortages – so always on call. The onus is on the supplier and if the pricing is within a pre-agreed pricing structure this was adhered to regardless of lead time. Therefore the supplier’s ability to maintain and predict their profitability could be impacted.
Vendor managed inventory or simply the advance of technology?
In the last few years, we have heard less of the VMI term in its own right and more about how business management technology has enabled a more responsive, transparent and collaborative supply chain.
Advances in business technology have provided more of a holistic approach to supply chain management; putting the customer at the heart.
Delivery drivers are now able to access warehouse management systems remotely via their handheld device (hardware is also becoming more cost accessible), which allows them to manage returns in one pass, review stock levels and therefore provide customers with a better service. This level of transparency and response in effect shortens the supply chain. Reverse logistics improves stock availability and supports demand forecasting.
In addition to EDI, suppliers and second line distributors can now directly access and integrate with their customers’ websites and portals that link the ERP directly into product catalogues online. Whilst this gives end users a better online ordering experience, it also creates a more “sticky” and entrenched relationship between supplier and customer. By integrating third party systems across the supply chain, long term partnerships are more likely.
Vendor managed inventory is therefore not in itself outdated, but it is more the term itself, as the supply chain can take a more inclusive and rounded approach due to accessibility.
For more information about optimising your stock management processes, please contact our distribution and manufacturing specialists at Prodware UK and ask us about how our industry specific solutions such as Mobility, ebusiness and WMS Suites within Microsoft Dynamics can help.