Vendor-Managed Inventory (VMI)
In many cases, it is not important for the company itself to have the responsibility for stocks of materials or pre-products. Inventory management is entrusted to the supplier, who usually handles it on the basis of electronically transmitted consumption data. As long as regular supply entails logistical problems, this is a partnership solution that substantially reduces storage costs while giving the supplier the advantage of strong customer loyalty. The supplier has greater freedom in planning deliveries and can, as a result, produce in more economical batch sizes, while at the same time responding more rapidly to demand fluctuations. VMI also makes for better utilization of transport capacities, fewer emergency deliveries, and reduced response times. Vendor-managed inventories often take the form of consignment stocks as far as transfer of title is concerned. The stocks remain the property of the supplier until actually requisitioned for use. VMI arrangements are especially suitable f or merchandise stocks with predictable, relatively high consumption rates.
Mutual trust between customer and vendor is a critical success factor for a vendor-managed inventory system. Any company intending to introduce it should do so in seven steps:
Define the parameters: The more carefully parameters are defined for each situation, the more successful the implementation of VMI (safety-buffer stock, minimum size of delivery batch, and so on)
Specify prices for vendor-managed inventories: VMI pricing must reflect the true costs to the supplier. This also in directly determines the value of financial benefits
Exploit an opportunity for supplier consolidation, since greater volumes with one supplier are more likely to produce meaningful VMI arrangements
Share responsibility for designing the process: A VMI model requires close cooperation and complete disclosure of information by both sides
Introduce key performance indicators (KPIs): These indicators (for example, forecasting accuracy, warehousing bottlenecks, and so on) will promote cost reductions in spite of high service levels
Introduce a forecasting model: Base the model on historical data that factors in seasonal and other influences
Have supplier buy up stocks: To start a program of vendor-managed inventories, the supplier should buy up all existing stocks
To summarize: VMI arrangements work so well because they identify those cost drivers along the value-creation / supply chain that influence inventories, allowing prices to the customer to be reduced without a loss of savings by the supplier.