VMI FAQ

What is VMI?

VMI stands for Vendor Managed Inventory, and is a common term used in many industries and channels. In some industries, VMI is also referred to as SAIM (Supplier Assisted Inventory Management).

By any name, VMI is a key to reducing costs and improving business performance.

VMI can be used for any two points in a supply chain: a supplier of inventory (source) and a replenished location (destination). This might be a manufacturer and a distributor, a manufacturer and an internal subsidiary, a supplier and an OEM (Original Equipment Manufacturer) or many other combinations of a supplier and a replenished location.

VMI is enabled by specialized software. This VMI software is dedicated to the task of automating the flow of product from source to destination with the goal of improving inventory performance while reducing total supply chain costs.

These two partners in the supply chain automate the sharing of ERP system data regarding inventory and sales, allowing the VMI software to manage the inventory flow and stocking levels at the replenished location.

Why VMI?

Simply put, supply chain excellence. Doing more with less requires that companies share more information, more real-time and find ways to automate business processes. VMI is about leveraging information to remove cost and time from the supply chain while delivering better service to the end customer. For many types of products, supply chain excellence as it relates to the end customer is the only means of differentiation. Service, cost and time are the measures of supply chain excellence. An accomplished VMI program often produces improvements in all three measures.

What are the goals of VMI?

• Improved product availability and inventory performance through timely information exchange and effective replenishment planning strategies.

• Cost reduction through process automation, allowing for exception management.

• Improved visibility of supply chain inventories and actual consumption rates to help ensure production more closely matches demand.

What are the benefits of a VMI program?

For a VMI program to succeed, both the supplier of the inventory and the replenished location must benefit.

For the supplier, the major benefits are:

• Increased Service Level To The End Customer
• Increased Sales Through To The End Customer
• Reduced Fulfillment Costs / Lead Times
• Improved / Expanded Relationship With Replenished Organization
• Smoother Demand Patterns
• Elimination Of Human Errors

For the replenished location, the major benefits are:

• Increased Service Level To The End Customer
• Increased Sales
• Reduced Fulfillment Costs / Lead Times
• Improved / Expanded Relationship With Supplying Organization
• Increased Return On Assets
• Elimination Of Routine Replenishment Activities

What is the history of VMI?

Basic sell one / replenish one models were in place in the grocery industry in the mid 1970's. These models were characterized by significant manual effort and an orientation to shelf level issues.

In the late 1980's, VMI came to the retail industries, with industry giants leading the charge. While these programs expanded the automation of the process, the objective often was to shift cost from one company in the supply chain to another. For this reason, success was limited.

VMI began in the Electrical Industry in 1993 when a couple of suppliers and their distributors agreed to work together to develop a better way of doing business.

They expanded on the historical models, incorporating a focus on eliminating work and cost for both the supplier and the replenished organizations. This period also saw the advanced replenishment theories postulated by previous studies in other industries implemented. There was significant technology hype during this period as the electrical industry raced to implement the concept, and then as the dot-com boom offered many alternative business models.

These VMI concepts are now being applied in many industrial / commercial channels.

Where is VMI on the technology HYPE CURVE?

Virtually all new technologies and business processes go through a "hype cycle" (see Figure 1) and Vendor Managed Inventory is no exception. For example, VMI has been a part of the Electrical Industry since 1993 and in that time VMI has seen the ebb and flow of results and mind share. Through its evolution VMI has followed an interesting, but not so unique path, to where it is today. The interest and implementation activity today is surpassing the level of activity experienced during the 'Peak of Inflated Expectations' phase (See this NAED Technology Informer article for information on the Technology Hype Curve). VMI has persevered and indeed prospered for one reason; when executed properly, VMI provides tangible, measured value to both the replenished and the supplying organizations.

Can Suppliers use VMI for Internal Replenishment?

Suppliers with an accomplished VMI system achieve significant benefits by using the process for Internal Replenishment points as well as for their supply chain partners.

We have an ERP system, why would we invest in VMI?

In our experience, all potential VMI users have an investment in an ERP system. For many, the decision point centers on the need for significant domain expertise and reputation to make a VMI program successful. The best VMI programs available today use software that "bolts on" to existing ERP systems.

Many of our clients have found that the benefits of an advanced VMI system justify the expense of replacing other replenishment systems, both purchased and homegrown.

Do I lose control with VMI?

VMI provides both supply chain participants with more control, not less. The VMI organizations shift from a tactical focus on routine, repetitive activities, to a strategic collaboration on objectives and achievements.

A strong VMI program includes the automation of the "collaborate, plan, execute and measure" cycle.

Is VMI applicable to my type of product?

This question is often posed when a company has one specific product in mind. Perhaps this is a product that is physically large, or expensive, heavy, subject to unusual demand patterns, etc. In many cases this specific product is a small but critical part of the companies catalog of products.

We have found that supply chain participants want one system that can handle all of their replenishment needs, not one for the 'easy' items and one for the problems.

An accomplished VMI program takes both the supplying and recipient organizational conditions and constraints into account as it plans and executes replenishment. These conditions / constraints may range from the global (all items) down to the micro (one specific item).

A VMI program with a sound theoretical base performs an automated analysis of product, cost, demand patterns and supply chain objectives at the micro level to produce a theoretically optimized replenishment method for each item. During replenishment execution, the theoretical optimal method is used in combination with the real world activity to produce superior supply chain results.

What are the key metrics used to determine the performance of a VMI process?

The most common metrics used are inventory turns, fill rate to the end-customer and transaction costs. An accomplished VMI system should do a better job of having the right inventory in stock at the right time at the right place, providing the opportunity to increase sales to the end customer; therefore sales trends should be monitored as well. Many other metrics are useful in analyzing key metric performance and creating improvement strategies.

Can VMI scale to a company my size?

A good VMI system can scale to support any size supply chain. The keys are a focus on process automation teamed with a viable technical architecture.

Will implementing VMI require a lot of I.T. work?

The best VMI programs recognize the issues with I.T. backlogs and costs, and are built to "bolt on" to existing ERP systems easily, with minimal I.T. work. As with many projects, the main issue is to understand exactly what must be done and create an effective plan. A VMI System vendor with a strong implementation methodology and experience is a major asset.

Will I need to buy specialized communication software too?

In our experience, most prospects and clients have a communications infrastructure suitable for VMI in place. VMI systems typically do not include communications software to eliminate an unnecessary redundant purchase, and the best are built to support any communications method.