VENDOR MANAGED INVENTORY (VMI)

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1 Traditional model of inventory management VENDOR MANAGED INVENTORY (VMI) customer submits an order to supplier inefficient? supplier does not receive information about the customer's needs in advance; he is forced to anticipate needs and keep unnecessary safety stocks, in order to meet all customer needs suppliers are often faced with an unexpected short-term demand, which leads to frequent changes in production and distribution, and creates additional costs Vendor managed inventory VMI represents a business model in which the buyer of a service or good provides certain information to a supplier of that product (the quantity of goods sold, liquid stocks) Based on information obtained supplier takes full responsibility for maintaining agreed inventory of the material, where buyer only informs about the increase or decrease of desired inventories Stage 1 Buyer sends an information about the number of goods sold to the wholesalers; information can be collected by bar code and sent via EDI (Electronic Data Interchange) or Internet; 1

2 Stage 2 Wholesaler is forwarding information about product description and about the amount of the products that are going to be deliverd, date of the delivery and the place of delivery; Stage 3 Distributer is sending all the datas connected with the need of the buyer and then they send it to the producer via EDI or Internet ( ULSuite/ULSuite.htm?VPButton) The goals of inventory management from the suppliers point of view Stage 4 Producer is restocking the supplies to the wholesalers; Stage 5 Wholesaler is sending an invoice to the buyer and buyer is paying for the goods. To reduce the ordering need; To reduce the number of supplies; Reorganize supply from push to pull. 2

3 Implementation of VMI Implementation of VMI Preparation Discussion about responsibilities of supplier and buyer; Common planning and forecasting with the goal of efective and efficient restocking. Implementation preparation The development of common plans and forecastings, determination of safety stocks, lead time, service levels.. Implementation of VMI Implementation The implementation of the project. Improvement Improvement that needs to be done because of the experience gained and identified problems while doing business. What are the benefits and disadvantages of VMI for the costumers? What are the benefits and disadvantages of VMI for suppliers? 3

4 COMMUNICATE expectations of all parties Customers and suppliers must make the effort to sit down and discuss the goals and objectives of implementing VMI The importance of this step cannot be overstated Customer must commit to sharing PRECISE information Suppliers must have visibility into the customer s internal sales and inventory information Without accurate data, ability to quickly meet demand will be impaired Suppliers must ensure RELIABLE transmission and use of information The supplier must be able to guarantee that the customer s trusted information will be communicated, received, and used securely to meet the designated needs Benefits of VMI for the supplier Demand smoothing (VMI information improves forecast of customer requirements, thereby enabling producers to plan production to meet costumer demand); Long-term customer relationship (due to high cost to the customer of switching to an alternative supplier); Improved operational flexibility (enabling production times and quantities to be adjusted to suit the supplier). 4

5 Customer advantages include Supplier disadvantages Reduced administrative costs (due to the elimination of the need to monitor inventory levels) Improved working capital (due to reduced inventory levels and obsolescence and improved stockturn with improved cash flow) Reduced lead time (with improved sales and a reduction of list sales through stockouts). Transfer of costumer costs to the supplier (these costs include those relating to administration and the cost of carrying increased to meet customer demand); Reduced working capital (due to improved inventory and administration costs). Customer disadvantages Wal-Mart and P&G Increased risk (resulting from the dependance on the manufacturer or distributor) Disclosure of potentially sensitive information to the supplier (the possession of such information will put the supplier in a strong position when a contract is renegotiated) Customers may be better positioned then suppliers to make replenishment decision. Wal-Mart approached P&G regarding the ordering of Pampers Wal-Mart was used to sending purchase orders that were fulfilled by P&G Wal-Mart was paying P&G 90 days after receiving the invoice As Wal-Mart received its money as soon as the costumer had bought the product in the store, this allowed Wal-Mart to invest the capital and gain additional financial revenues 5

6 Wal-Mart and P&G Wal-Mart suggested that P&G would own the stock in the Wal-Mart stores and distribution centers, and be notified every time Wal-Mart sold their product P&G would be allowed to send a monthly invoice corresponding to the actual consumption by Wal-Mart (invoice would be paid after 90 days) P&G would be responsible for ensuring that Wal-Mart always had stock, and it would be up to P&G to define what the appropriate stock levels were The advantage and disadvantage to Wal-Mart The advantage was an assurance of supply and a reduction of its procurement costs, as Wal-Mart no longer needed to raise orders and match orders and invoices The disadvantage was that it would only be able to use the funds from the sale tor the 90 day period The advantage and disadvantage to P&G The advantage to P&G was a better understanding of when and where their products were sold, a reduction in order management costs and reduction in order-to-cash cycle time The disadvantage was that P&G now needed to manage the Wal-Mart inventories and that they now owned that inventory 6