Vendor Managed Inventory

Vendor Managed Inventories (VMI) is an effective supply chain strategy where the vendor takes the responsibility to maintain the inventory of the customer and in return vendor, buyer and or both parties are benefited by the proper utilization of it. This paper explains how the total VMI process work toward the mutual goal of suppliers and customers. It has the explanation how the VMI helps to increase sales, reduces operating cost and build strong customer relationships for the vendor. From the customer side it explains how the VMI helps customer to reduce inventory, reduce administrative costs, less stock-outs and increase sales etc.

The information collected for this paper is all from secondary sources means scientific journals, various research papers, and scholarly books. Proper citation has been used wherever it is necessary. Vendor Managed Inventories Contents 1. Chapter 1 … 1. 1 Introduction … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … 4 4 4 5 6 6 6 6 7 7 8 11 1. 2 Literature review 1. 3 Traditional supply chain vs. VMI 1. 4 How VMI works 2.

Chapter 2 … … 2. 1 Benefits for the manufacturer … 2. 2 Benefits for the distributors … 2. 3 Negative impacts of VMI Conclusion References Appendix … … … … … … … … … … … … … Vendor Managed Inventories Chapter 1 1. 1 Introduction Vendor Managed Inventories (VMI) can be defined as the production and distribution system where the manufacturer or the vendor takes major responsibility on behalf of the buyers. The key point form the above definition is that in the case of VMI vendor takes the responsibility of the buyer’s ordered inventory (Waller et al. , 1999).

VMI can also be defined as the tool that is used to improve customer service and to reduce inventory cost for the manufacturer (Achabal et al. , 2000; Daugherty et al. , 1999 & 2000). VMI was first implemented between Wal-Mart and Proctor & Gamble in the late 1980s where the retailer demanded the vendor to take the responsibility for the ordered goods (Cachon & Pisher, 1997). Now-a-days, VMI is not only limited to retailing business but also in different sectors of business for example, Shell Chemical and Campbell Soup have used VMI as a successful tool to improve inventory management (Cachon & Pisher, 1997).

It has also become popular to the grocery and garments industry (Schenck & McInerney, 1998). It is clear that the growing popularity of VMI has proved now and in the next chapter we will discuss this in detail with the help of authentic sources. 1. 2 Literature Review There are many literatures available that explains inventory management system. In the literature review part we tried to seek how previous research supports that VMI helped manufacturer and buyers to achieve their mutual benefit. One research suggests that VMI helps to reduce inventory cost (Yao et al., 2007).

In the case profit increments, VMI helps to increase buyer’s profit (Dong & Xu, 2002). Another study suggests that VMI helps to improve customer service level, inventory planning and reduce costs (Clalssen et al. , 2007). In the case of service level increment one study shows that VMI helps to reduce overall stock of raw materials by 37 percent by continuous increment of service level (Gronalt & Rauch, 2007). VMI also facilitates benefits in the case of processing information of customer demand (Chueng & Lee, 2002).

Vendor Managed Inventories 1. 3 Traditional Supply Chain vs. VMI In the traditional supply chain system the flow of physical products starts from the factories to the retailers and finally it goes to the final consumers. In response of the goods and services, customer payments to the manufacturer work as the flow of the information to the manufacturer (Disney et al. , 2003). A four echelon traditional supply chain system that consists of raw material supplier, manufacturer, retailer and end customer has shown in figure 1(See appendix).

In traditional supply chain system each company operates their supply chain system on an individual basis (Disney et al. , 2003). It delays the decision making process, long lead time and inconsistent information system among the parties (Childerhouse & Towill, 2000). To place and execute an order it takes longer time because each point a party takes his own decision based on his own situation and it causes mismanagement in inventory levels, order shipment and to receive the orders (Senge, 1990).

According to Disney et al. , (2003), Lack of proper information the requirements of final consumer is difficult to understand. It causes several problems; first, due to the long response time and fluctuations in the pattern of demand it causes distortion of the actual customer demand when the vendor receives the demand. Second, it causes difficulties to deliver in economies of scale. Third, it causes mismanagement in order placement. In VMI supply chain system the vendor controls the buyer’s order so that the maximum customer satisfaction can be achieved (Disney et al. , 2003). The VMI process has shown in figure 2 (See appendix).

In VMI system when the vendor takes the responsibility of the buyer’s ordered inventory then production maximization and efficient transportation can be ensured (Waller et al. , 1999). The success of a VMI depends on sharing of information among the parties regarding sales and inventory management to the customer (Andel, 1996). VMI helps to get benefits for the vendor and customer both. The vendor can get the consistent information about the final customer and it helps the vendor to forecast about the future demand and activities of the final customer (Disney, 2001).

It helps to increase service level when the availability of the product is ensured from the vendor (Waller et al. , 1999). It reduces buffer stocks and ultimately it has a positive impact on the cost effectiveness (Sabath, 1995). It helps both vendor and the customer in the long run (Dong & Xu, 2002). Vendor Managed Inventories 1. 4 How VMI Works VMI works as a program where the vendor is responsible to manage order and inventory for the customers (Dong et at. , 2010).

VMI works with two major components, first, consistent information sharing and transfer the decision from vendor to the customer (Clark & Hammond 1997). When the customer clarify his expectations to the vendor and vendor do so as well then both parties can know about their required jobs to do. When both parties has clear and consistent information then vendor can set a long term goal to manage the inventory for his customer as a long term basis because long term goal is more profitable for the vendor.

The vendor and customer can share business information in a timely manner so that the vendor is not confused to forecast the demand of the customer and ultimately the distributor is not in a risk of stocks out. Chapter 2 In the previous chapter we have discussed some of the positive impacts of VMI in different places but in this chapter we will introduce some benefits of VMI for manufacturer and distributors separately in separate paragraphs.

2. 1 Benefits for the Manufacturer The manufacturer can know the inventory levels of the distributor and he can clearly estimate the production accomplishment pattern and order maintenance (Iyer & Bergen, 1997; Cetinkaya & Lee, 2000; Yao et al., 2007).

The manufacturer can account his actual inventory level by seeing the distributor’s order pattern and ultimately it helps to avoid the bullwhip effect (Drezner et al. , 2000; Lee et al. , 1997; Raghunathan, 2001). When the manufacturer is dealing with several firms at the same time then it can coordinate the orders of several firms together at the same time (Cetinkaya & Lee, 2000; Raghunathan & Yeh, 2001).

For the above benefits of the manufacturer it is clear that the VMI helps the manufacturer to increase his profits by increasing the sales volume, reducing operating cost of production and to build strong customer relationships for the long term. 2. 2 Benefits for the Distributors In VMI the benefits of distributors are not as clear as manufacturer (Dong et at. , 2010). VMI reduces the supply risk of the distributors because when the manufacturer knows the Vendor Managed Inventories inventory management information of the distributor then he can improve the production planning system (Cetinkaya & Lee, 2000; Cheung & Lee, 2002).

The distributor can avoid the supply risk in case of emergency as both parties share information consistently about production planning of the manufacturer. After analyzing the benefits of the distributor from above discussion and from chapter one it can be concluded that it helps the distributor to increase his profit by reducing inventory, increasing sales, shortening stocks-out etc. 2. 3 Negative Impacts of VMI Many researchers suggest that the improper implication of VMI has some negative impacts but these are not that much bigger as compared to the benefits of VMI.

We went through some of the studies and summed up the negative effects in precise way. When the vendor manages many orders from different distributors then it can loss the control over all customers because vendor plays the major role. Sometimes it effects the commissions and incentives approach because the retailers do not need to make a big stock of goods to avoid uncertainty. On the other hand, this less stock of goods sometime causes stocks-out if there is any sudden unavoidable situation happens in that particular region that occurs disruption to ship the goods from the vendor.

Ultimately, it can cause loss sale and it leads bad company reputation in long run. Conclusion This paper focused on the overall aspects of VMI and how it helps the manufacturer and the distributor for smooth business operation. It is clear that although VMI is started its journey in 1980s but it has gained its popularity through the implications of many giant multinational companies. Most of the literature suggested that as it is the vendor managed inventories the manufacturer gains more benefits than the distributors. It improves the information quality between manufacturers and the distributors.

It also helps to improve the service quality and reduce cost for both parties. Finally, VMI works as an important tool in the integrated supply chain strategy between manufacturers and distributors. It would be better if we could create our own proposed model of VMI addressing a real problem of a company by a quantitative study. Further research is suggested to find out more positive features of VMI that can help manufacturer and customer to gain more mutual benefits. Vendor Managed Inventories References Achabal, D. D. , McIntyre, S. H. , Smith, S. A. , & Kalyanam, K. (2000). A decision support system for vendor-managed inventory.

Journal of Retailing. 76 (4), 430-454 Andel, T. (1996). Manage inventory, own information. Transport and Distribution. 37 (5), 5458 Cachon, G. & Fisher, M. (1997). Campbell soup’s continuous replenishment program: Evaluation and enhanced inventory decisions rules. Productions and Operations Management. 6(3), 266-276 Cetinkaya, S. & Lee, C. Y. (2000). Stock Replenishment and Shipment Scheduling For Vendor-Managed Inventory Systems. Management Science, 46(2), 217-232 Cheung, K. L. & Lee, H. L. (2002). The inventory Benefit of shipment Coordination and stock rebalancing in a supply chain. Management Science, 48(2), 300-306.

Childerhouse, P. & Towill, D. (2000). Engineering supply chains to match customer requirements. Logistics Information Management, 13 (6), 337-345 Clalssen, M. J. T. , Weele, A. J. V. & Raaij, E. M. V. (2007). Performance Outcomes and Success Factors of Vendor Managed Inventory (VMI). Available at URL:www. arjanweek. com/39/assets/File/Publication,,articles/Publications… /classen%20 vanweek%20vanraaij%202007%201psera. pdf Clark, T. H. , & Hammond, J. (1997). Reengineering Channel Reordering Processes to Improve Total Supply Chain Performance. Production and Operations Management, 6(3), 248265 Daugherty, P. J. , Myers, M. B.

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& McInerney, J. (1998). Applying vendor-managed inventory to the apparel Industry. Automatic I. D. News 14 (6), 36–38 Senge, P. M. (1990). The Fifth Discipline. Random House, London Waller, M. , Johnson, M. E. & Davis, T. (1999). Vendor-managed inventory in the retail supply chain. Journal of Business Logistics, 20(1), 183-203 Yao, Y. , Events, P. T. , & Dresner, M. E. (2007). Supply chain integration in vendor-managed inventory. Decision Support Systems, 43, 663-674 Vendor Managed Inventories Appendix Figure 1. The traditional supply chain system (Disney et al. , 2003, p. 365) Figure 2. VMI supply chain system (Disney et al. , 2003, p. 367)