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Vendor Managed Inventory

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1.4 : How Does Vendor Management Inventory Work?

The Vendor Managed Inventory (VMI) process can in be divided into 3 aspects data communications, calculations, monitoring and reporting. Data Communications and Calculations

The VMI process starts with the customer sending a Product Activity Report (1). This report contains demand information such as sales and transfers, along with inventory position information such as on-hand, on-order and in-transit for the items that changed since the last report.

The VMI begins with customer placing a Product Activity Report (1). The report consist of demand information

The VMI software analyzes the data and creates recommended replenishment orders (2) . The recommendations are based on algorithms which use factors such as forecasts, frequency of sale, and dollar velocity of sales. Ideally, these processes include:

* Periodic (e.g. weekly) review and calculation of order points and order quantities based on movement data and special information such as promotions, seasonality, etc. * Frequent (e.g. daily) comparison of on-hand inventory to order point and generation of recommended replenishment orders

The supplier's planner reviews the recommended orders and any exception conditions before approving appropriate orders (3) . The VMI system then sends:

* A Purchase Order to the supplier (4) * A Purchase Order Acknowledgment to the customer (5)

Monitoring and Reporting
When trading partners begin VMI, they start by agreeing upon objectives for: * Inventory turns * Fill rates (in-stock percentages) * Transaction costs

The system monitors actual activity with measurements against those objectives. The system must report the same information to both the supplier and the customer so that the process is highly transparent. Information should always be available to both parties on-demand. Ideally, the VMI system should also provide exception alerts to both parties when measurements get outside an acceptable range or when a problem with the data appears.

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3.3 : Challenges/ Concerns to be addressed

VMI Implementation Challenges
VMI can be made to work, but the problem is not just one of logistics. VMI often encounters resistance from the sales force and distributors. At issue are roles and skills, trust, and power shifts. Some of the sales force concerns are: * Loss of control * Effect on compensation - incentive bonuses may depend on how much is sold, but sales force has less influence under VMI. * Possible loss of job * Skepticism that it will function well - technical problems * Concern that reduced inventory will result in less shelf space and therefore loss of market share. This concern can be addressed by filling the shelf space with other stock keeping units from the same vendor.

Distributors also may have concerns about vendor managed inventory, including: * Inventory will be pushed on them * No more promotions, discounts, and forward buying * With less inventory, more risk of disruptions due to strikes, adverse weather, etc. * The vendor enjoys the benefits while the distributor gives up its only lever of power - data on what the retailers want. * Danger of being replaced - vendor may decide to forward integrate.

Addressing Concerns

For a VMI system to work, the concerns of distributors and the sales force must be addressed. They can be at least partially addressed by the following: * Transform the sales role into one of marketing. For example, bonuses can be given based on the number of new clients. * Distributor skepticism can be addressed by implementing a pilot program with vendor-owned warehouses in order to demonstrate that the system works. Introduce system in distributor-owned warehouses on a pilot basis. * Engage a neutral consultant in meetings among the vendor, distributor, and sales force. * Allow some manufacturer promotions in the transition. * Extensively simulate the system off-line before implementing. * Don't exaggerate the benefits of VMI; otherwise, any delay in realizing the benefits may cause the supply chain to lose faith in the system.

1.3 : The Vendor Managed Inventory Approach

VMI reduces stock-outs and reduces inventory in the supply chain. Some features of VMI include: * Shorten of the supply chain * Centralized forecasting * Frequent communication of inventory, stock-outs, and planned promotions. Electronic Data Interchange (EDI) linkages facilitate this communication. * No manufacturer promotions * Trucks are filled in a prioritized order. For example, items that are expected to stock out have top priority, then items that are furthest below targeted stock levels, then advance shipments of promotional items (promotions allowed only in transition phase), and finally, items that are least above targeted stock levels. * Relationship with downstream distribution channels

The vendor managed inventory system eliminates stock-outs and inventory in the supply chain. Shorten of the supply chain; The VMI reduces the need for intermediaries in the supply chain with only the vendor and customer. Centralized forecasting is done by the vendor in facilitate efficient and effective production and shipping schedule. Electronic Data Interchange (EDI) facilitates the communication of the inventory, shortages and scheduled promotional activities. This also avoids vendor promotion. Transportation is scheduled based on the level of priority. The products that are about to stock out will be placed on higher priority followed by product nearer the restock level and advance shipment of advertised items. The VMI also establish the relationship with vendor and its downstream distribution channels.

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