VMI can provide significant savings for the supply chain over RMI in almost all scenarios capturing nearly all benefits. VMI can be particularly beneficial for products with high demand variance or high outsourcing cost. In the last decade, many companies have changed their supply chain structure from retailer managed inventory (RMI) to vendor managed inventory (VMI) in which the vendor decides the quantity to be stocked at the retail location(s).
In a true VMI setting, the supplier has the freedom to plan its own production and decide the replenishment schedules as long as the agreed customer service levels are met. VMI is often implemented with minimum and maximum levels for inventory and the vendor is responsible in maintaining those. VMI shifts responsibility in decision making of the replenishment schedule and inventory management from the customer to the supplier.
The ability to execute VMI effectively can be seen as an organizational capability, which on other hand is a competitive advantage. A shift from RMI to VMI can involve different changes involving the implementation of new IT systems to enable the vendor to access point-of-sale data, development of trust between vendor and retailer, and the role of vendor’s sales force. It also requires a reconsideration of the supply chain contracts. Analyzing and understanding how supply chain contracts perform under VMI (and RMI) are important for retailers (online & bricks) and supply chain professionals. Some popular coordinating supply chain contracts are as presented below:
To enable coordination, the supply chain resorts to contracts. In general, the goal is to write contracts that induce coordination through appropriate provisions for information and incentives such that supply chain performance will be optimized.
VMI Key Success Factors
Even though VMI system promises a lot, the real life implementations are not always so successful. “Out of 10 VMI implementations, three or four achieve great benefits. Three or four have some benefits, but not as much as anticipated, and two or three do not get any benefits”. There are four different categories for enablers of VMI process:
Relevant information sharing and
Quality of communication system.
To ensure that total supply chain costs under VMI are lower than those under RMI. The inventory quantity variation can be used to obtain different divisions of costs between the retailer and its supplier. The potential benefit of VMI is greater when demand is more variable.
The benefits to a supply chain from two important attributes of VMI programs: shipment coordination and stock re-balancing. Shipment scheduling in the context of VMI, the vendor is to coordinate inventory and transportation decisions.
VMI needs changes mentally, technologically, operationally and contractually so it is not a simple project to implement without proper preparation. This applies especially in situations where neither of the parties involved have previous knowledge of setting up a VMI. More planning should be done on how VMI works in digital-enabled-business relationships and how the technical aspects are handled in such relationships.
Operational Intelligence, Smart Manufacturing and Supply Chain Optimization Expert
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