1. What is VMI?
2. Why VMI?
3. What are the goals of VMI?
4. What are the benefits of a VMI
5. What is the history of VMI?
6. Where is VMI on the technology HYPE
7. Can Suppliers use VMI for Internal
8. We have an ERP system, why would we
invest in VMI?
9. Do I lose control with VMI?
10. Is VMI applicable to my type of
11. What are the key metrics used to
determine the performance of a VMI process?
12. Can VMI scale to a company my
13. Will implementing VMI require a lot
of I.T. work?
14. Will I need to buy specialized
communication software too?
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
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
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:
For the replenished location, the major benefits
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
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
Can Suppliers use VMI for Internal
Suppliers with an accomplished VMI system achieve
significant benefits by using the process for Internal
Replenishment points as well as for their supply chain
We have an ERP system, why would we invest in
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
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
A strong VMI program includes the automation of the
"collaborate, plan, execute and measure"
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
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
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
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.
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
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