Vendor Managed Inventory Research Paper

PROCUREMENT

VENDORS MANAGED INVENTORIES

Vendor Managed Inventory (VMI) is a supply chain practice where the inventory is monitored, planned and managed by the vendor on behalf of the consuming organization, based on the expected demand and on previously agreed minimum and maximum inventory levels. In its simplest form, Vendor Managed Inventory is the process where the vendor assumes the task of generating purchase orders to replenish a customer’s inventory. VMI is a term that is used to describe many types of supply chain initiatives.Traditionally, success in supply chain management derives from understanding and managing the tradeoff between inventory cost and the service level.

The Vendor Managed Inventory Approach

VMI reduces stock-outs

• Severe consequences in case of human errors (Pharmaceutical).

• Industries with steady and high volumes (Retail, Consumer Products).

• Industries with high-value inventory and a high level of demand unpredictability (High Tech).

• Management with strong leadership capability to form strategic long term partnerships (Automotive).

VMI Implementation Challenges

VMI can be made to work, but the problem is not just one of logistics. VMI often encounters resistance from the sales force and distributors. At issue are roles and skills, trust, and power shifts. Some of the sales force concerns are:

• Loss of control

• Effect on compensation - incentive bonuses may depend on how much is sold, but sales force has less influence under VMI.

• Possible loss of job

• Scepticism that it will function well - technical problems

• Concern that reduced inventory will result in less shelf space and therefore loss of market share. This concern can be addressed by filling the shelf space with other stock keeping units from the same vendor.

VENDOR

Vendors or suppliers are given standing, status, or title according to their attainment of some level of performance, such as delivery, lead time, quality, price, or some combination of variables. The motivation for the establishment of such a rating system is part of the effort of manufacturers and service firms to ensure that the desired characteristics of a purchased product or service is built in and not determined later by some after-the-fact indicator. The vendor rating may take the form of a hierarchical ranking from poor to excellent and whatever rankings the firm chooses to insert in between the two. For some firms, the vendor rating may come in the form of some sort of award system or as some variation of certification. Much of this attention to vender rating is a direct result of the widespread implementation of the just-in-time concept in the United States and its