(VMI)(VMI)VENDOR MANAGED VENDOR MANAGED

INVENTORYINVENTORY

(VMI)(VMI)VENDOR MANAGED VENDOR MANAGED

INVENTORYINVENTORYbyby

Bader BamegbelBader BamegbelOsama BukhariOsama BukhariAbdullah Ja’farAbdullah Ja’far

What is VMI?What is VMI?

• A means of optimizing Supply Chain performance in which the manufacturer is responsible for maintaining the distributors inventory levels.

• The manufacturer has access to the distributor’s inventory data and is responsible for generating purchase orders.

Typical business Typical business model:model:

• The Distributor places an order from the manufacturer.

• The distributor is in total control of the timing and size of the order being placed.

• The distributor maintains the inventory plan.

• Setup and order cost are included.

VMI Model:VMI Model:

• Date ( sales & stock levels) are sent from the distributors to the manufacturer via internet or EDI.

• The manufacturer can view every item that the distributor carriers as well as true point of sale data.

• the manufacturer generates the order, not the distributor.

VMI HistoryVMI History

• (VMI) was coined in the USA in the early 1990s.

• The major projects was being implemented by Wal-Mart, K-Mart and Home Depot.

• manufacturers began to see it as an effective way of regaining control of their supply chain and reducing the power base of the large retailer.

Benefits of VMIBenefits of VMI

• Smoother demand.• Increasing in sales.• Lower inventories and reduced

costs to other industries. • Planning and ordering cost will

decrease due to the responsibility being shifted to the suppliers.

BenefitsBenefits

• The overall service level is improved by having the right product at the right time.

• Having the correct item in stock when the end customer needs it, benefits all parties involved.

• React more quickly to market requirements.

• Manage new product better.• Reducing stock out rate.

Implementation of Vendor Implementation of Vendor Managed InventoryManaged Inventory

Implementation of Vendor Implementation of Vendor Managed InventoryManaged Inventory

Implementation of VMIImplementation of VMI

• Agreement between supplier and retailer

( fill rates, frequency of replenishment(

• Informing about VMI - Employees, inventory and replenishment planners - Strategic management team should understand the concept and be ready to accept the concept of inventory management by a third party

Implementation of VMIImplementation of VMI• Data Exchange

1) A one-time exchange of retailer’s sales history (daily/weekly)2) Ongoing product activity data exchange using EDI.

- EDI refers to thecomputer-to-computer transmissionof business information betweentrading partners- Covering all possible documents exchanged and for all types of products.

Implementation of VMIImplementation of VMI

Implementation of VMIImplementation of VMI

• Ordering- the vendor calculates the reorder point- The quantity available with retailer is then compared to the calculated reorder quantity level and order quantities are determined

Implementation of VMIImplementation of VMI

- The created orders will be communicated tothe retailer.

- Finally, the shipment is sent.

Implementation of VMIImplementation of VMI

• Invoice Matching

• Measurement

Basic VMI SoftwareBasic VMI SoftwareBasic VMI SoftwareBasic VMI Software

Basic VMI SoftwareBasic VMI Software

1) Homemade

- Requires expert in the area of VMI, Inventory Management and a few good programmers

- Reflects the uniqueness of your company.

Basic VMI SoftwareBasic VMI Software

2) Pre-Packaged

- EDI or Internet based

- Sometimes it  can be customized to meet your companies specific needs.

Successful example Successful example of VMI of VMI

implementationimplementation

Successful example Successful example of VMI of VMI

implementationimplementation

Wal-Mart and P&GWal-Mart and P&G

• Wal-Mart tired to utilized its capabilities to make more inventory of the most demanded items while reducing the overall inventory.

• Networked its supplier by computers.

• Cooperates with Proctor & Gamble (P&G) for maintaining inventory in stores.

• Built an automated re-order system linking all computers between P&G and its stores and other distribution centers.

Wal-Mart and P&G

How the collaboration worked

• The computer system at Wal-Mart stores identified an The computer system at Wal-Mart stores identified an item which was low in stock and sent a signal to P&G.item which was low in stock and sent a signal to P&G.

• the system sent a re-supply order to the nearest P&G the system sent a re-supply order to the nearest P&G factory through a satellite communication system.factory through a satellite communication system.

• P&G delivered the item either to the Wal-Mart P&G delivered the item either to the Wal-Mart distribution center or directly to the concerned stores.distribution center or directly to the concerned stores.

Wal-Mart and P&G

• Successful proposition for both.

• Wal-Mart could monitor its stock levels in the stores constantly .

• identify the items that were moving fast.

• P&G could also lower its costs.

CASE STUDYCASE STUDYCASE STUDYCASE STUDY

Point Spring & Draft Shaft Point Spring & Draft Shaft CompanyCompany

• PSD is a leading distributor of medium and heavy-duty truck parts.

• In 1997 PSD combined with Brak Drum & Equipment Company to expand their scope of expertise and better service their customers.

• Out of 5,000 truck parts distributor, PSD was recently recognized by truck parts and service magazine as one of the top five distributors in the United States.

• The critical component of PSD’s success is to have the right parts available at the right time.

• Point Spring manager, states, “When we don’t have the right parts on-hand, the process of expediting orders drives our costs up and therefore, reduces our margins and potential profit.“

• Why PSD used VMI?

• Using the traditional business systems to manage inventory were sufficient, but they had limitations.

• Critical inventory activities information was not updated frequently enough to maintain a clear picture of fluctuating customer demand.

• “These systems were slow to react which put us in stock-out situations and forced us to expedite orders at substantial increase in costs, in order to maintain our customer service commitments”.

• PSD’s weak working relationship with suppliers affects its ability to satisfy demand of its customer.

• PSD found many of the leading companies were using VMI to gain the benefits that it was looking for.

• research led PSD to Enterprise Data Management and their Datalliance VMI service.

• VMI was applied in PSD to only some product

lines.

Results from using VMI

• helped PSD effectively manage inventory.

• the appropriate quantity of a specific part in stock, when the customer needs it.

• Sales in VMI lines increased between 7%-10% with no increase in inventory.

• VMI helped PSD to decrease inventory carrying and expediting cost.

• VMI product lines actually increased slightly to 96%.

• VMI benefits the suppliers in making good forecasts and manufacturing plans due to daily basis customer demands available.

• "We absolutely value our suppliers that use VMI, and have set an objective to convert our top 15 suppliers to VMI as soon as possible," concludes Ryan.

Non successful Non successful example of VMI example of VMI implementationimplementation

Non successful Non successful example of VMI example of VMI implementationimplementation

K-Mart ExampleK-Mart Example• K-Mart has also cut back its VMI program from more

than 300 suppliers down to about 50.

• vendor departments achieve service levels of 99.5% while maintaining inventory levels at more than 70% below objective.

• found most manufacturers did not have adequate forecasting.

• K-Mart's loss of control over the scheduling of shipments was a major factor in trimming the program.

The biggest The biggest obstacles to obstacles to

VMIVMI

The biggest The biggest obstacles to obstacles to

VMIVMI

• Two major obstacles to a successful VMI implementation:

• Strategic: the concerns most often expressed at the distributor level.

• Some distributors concerned about letting their private information getting into the hands of their vendors.

• At the strategic level, a high level decision must be made about how the company wants to position itself.

• Operational: job functions, processes and performance measurements will all need to change in order to get the most benefit.

• The sources of resistance are many, but the most common is change.

• Other issues that interrupt VMI implementation are regarding the management of change and specific job changes.

• Concerns such as the role of buyers and sales people in the new environment and the new measurement systems must be addressed.

ConclusionConclusion

• Although there has been some cases with unsatisfactory results in applying VMI concept, but in general the VMI systems has been highly successful in most experiences.

• On paper, VMI seems simple to implement, but in the real world of personalities and professional relationships, there are many obstacles to climb.

• In short, trust is very important for the VMI model to succeed.

Questions Questions & Answers& AnswersQuestions Questions & Answers& Answers