Vendor Managed Inventory Is Here

Vendor Managed Inventory Is Here to Stay

In addressing the question of whether Vendor Managed Inventory (VMI) is a stop-gap measure or is a permanent strategy on the part of suppliers, supply chain intermediaries and customers, it's critical to look beyond the cyclicality and recessionary conditions that were in effect when Scouras (1) wrote his article on VMI performance. Since 2002 when the article was written, VMI has become a mainstay of supply chain visibility, performance, and become integral to the development of distributed order management systems globally. The rapid globalization of supply chains and with it, the growth of multi-site manufacturing, sourcing, supply chain, and services locations globally all have been enabling factors of the growth of VMI. In response to these globalization trends there is also a major focus on how to streamline and increase the level of visibility throughout supply chains as well.

Automating the Vendor Managed Inventory (VMI) Process

The benefits of having a defined process for initiating, maintaining and over time optimizing the VMI process within any supply chain requires more of a focus on measuring supply chain performance and visibility first. The VMI process has been in existence for decades, and as a result has often formed the foundation for entire supply chains. The dominance of Ingram Micro for example in the personal computer, software and networking market is a case in point. Ingram has used VMI strategies for ensuring suppliers stay in tight coordination with the demands of buyers, often having dealer and distributor customer representatives within the Ingram warehouses to specifically manage inbound vendor inventory shipments and their synchronization with outbound orders. VMI as a process continues to mature, and in the last three years and increasing number of industries are beginning to look at enterprise software for managing these many synchronization points necessary for having a successful VMI strategy throughout a supply chain. This trend towards VMI becoming increasingly critical in not only supply chains but in the approach companies use to set expectations with customers and fulfill them is also fueling the automation of this process area. For these reasons, VMI is becoming an increasingly critical strategic tool in many distribution-centric and manufacturing-centric companies.

While best-in-class distribution and manufacturing companies realize that VMI is a powerful competitive weapon in that it can drastically reduce the costs of inventory and also reduce stock-outs, increase fill rates, and make order accuracy much more achievable, many companies have yet to adopt this process workflow and perfect it in their supply chains. The use of manually-based processes instead is what pervades many manufacturing companies especially, who continue to implement manually-based workarounds to increasingly complex supply chain requirements. The best practices emerging however from many industries specifically in the area of VMI and supply chain visibility show that the many hours lost due to being tactically- focused when it comes to supply chain planning is never recovered even in price concessions from suppliers upstream in the supply chain. Instead, best practices in VMI implementations today are reflecting the demand chain implications of customer requirements including order delivery times and order customization. These best practices companies are focused more on turning inventory management into a competitive advantage that cannot be easily replicated by competing manufacturers, through the use of precise alignment to specific customer requirements. VMI as a process area is giving manufacturers the opportunity to compete more effectively on responsiveness and delivering of orders that exactly align with the needs of customers, rather than relying only on price reductions as the only approach to winning new business. Inventory management through VMI leads to a much more cohesive, integrated and concerted response to customer demand in the companies who have turned this process area into a best practice.

Additional benefits of adopting an aggressive state-of-the-art VMI system include the following, which are defined by Askegar and Suleski (2) in table 1 of their landmark research study on the topic. The ability of manufacturers and distribution companies alike to increase their level of segmentation to customer needs and requirements is immediately evident in companies who achieve best-in-class performance on VMI. This higher level of performance translates into an above-average level of Return on Assets (ROA) and also a higher level of performance on Return on Invested Capital (ROIC) which is a critical measure of how well warehouse, shipping and fulfillment operations are being utilized in conjunction with VMI workflows.