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Traditional model of inventory

management

VENDOR MANAGED
INVENTORY (VMI)

customer submits an order to supplier

inefficient?

Vendor managed inventory

VMI represents a business model in

which the buyer of a service or good
provides certain information to a
supplier of that product (the quantity of
goods sold, liquid stocks)
Based on information obtained supplier
takes full responsibility for maintaining
agreed inventory of the material, where
buyer only informs about the increase
or decrease of desired inventories

supplier does not receive information

about the customer's needs in advance;
he is forced to anticipate needs and
keep unnecessary safety stocks, in
order to meet all customer needs
suppliers are often faced with an
unexpected short-term demand, which
leads to frequent changes in production
and distribution, and creates additional
costs

Stages of the simple VMI

system

Stage 1

Buyer sends an information about the

number of goods sold to the
wholesalers; information can be
collected by bar code and sent via EDI
(Electronic Data Interchange) or
Internet;

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Stages of the simple VMI

system

Stages of the simple VMI

system

Stage 2

Stage 3

Wholesaler is forwarding information

about product description and about
the amount of the products that are
going to be deliverd, date of the
delivery and the place of delivery;

Distributer is sending all the datas

connected with the need of the buyer
and then they send it to the producer
via EDI or Internet

(http://kanban.com/ResourceCenter/
ULSuite/ULSuite.htm?VPButton)

Stages of the simple VMI

system

The goals of inventory management

from the suppliers point of view

Stage 4

Producer is restocking the supplies

to the wholesalers;

Stage 5

To reduce the ordering need;

To reduce the number of
supplies;
Reorganize supply from push
to pull system.

Wholesaler is sending an invoice to

the buyer and buyer is paying for the
goods.

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Implementation of VMI system

Implementation of VMI system

Preparation
Discussion about responsibilities
of supplier and buyer;
Common planning and
forecasting with the goal of
efective and efficient restocking.

Implementation preparation

The development of common plans

and forecastings, determination of
safety stocks, lead time, service
levels..

Implementation of VMI system

Vendor Managed Inventory: three

steps in making it work

Implementation

The implementation of the project.

Improvement

What are the benefits and

disadvantages of VMI for the
costumers?
What are the benefits and
disadvantages of VMI for suppliers?

Improvement that needs to be done

because of the experience gained
and identified problems while doing
business.

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Vendor Managed Inventory: three

steps in making it work

COMMUNICATE expectations of all

parties
Customers and suppliers must make
the effort to sit down and discuss the
goals and objectives of implementing
VMI
The importance of this step cannot
be overstated

Vendor Managed Inventory: three

steps in making it work

Vendor Managed Inventory: three

steps in making it work

Benefits of VMI for the supplier

Suppliers must ensure RELIABLE

transmission and use of information
The supplier must be able to
guarantee that the customers
trusted information will be
communicated, received, and used
securely to meet the designated
needs

Customer must commit to sharing

PRECISE information
Suppliers must have visibility into the
customers internal sales and
inventory information
Without accurate data, ability to
quickly meet demand will be
impaired

Demand smoothing (VMI information

improves forecast of customer
requirements, thereby enabling
producers to plan production to meet
costumer demand);
Long-term customer relationship
(due to high cost to the customer of
switching to an alternative supplier);
Improved operational flexibility
(enabling production times and
quantities to be adjusted to suit the
supplier).

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Customer advantages include

Reduced administrative costs (due

to the elimination of the need to
monitor inventory levels)
Improved working capital (due to
reduced inventory levels and
obsolescence and improved stockturn with improved cash flow)
Reduced lead time (with improved
sales and a reduction of list sales
through stockouts).

Customer disadvantages

Increased risk (resulting from the

dependance on the manufacturer or
distributor)
Disclosure of potentially sensitive
information to the supplier (the
possession of such information will
put the supplier in a strong position
when a contract is renegotiated)
Customers may be better
positioned then suppliers to make
replenishment decision.

Supplier disadvantages

Transfer of costumer costs to the

supplier (these costs include those
relating to administration and the cost
of carrying increased to meet
customer demand);
Reduced working capital (due to
improved inventory and
administration costs).

Wal-Mart and P&G

Wal-Mart approached P&G regarding the

ordering of Pampers
Wal-Mart was used to sending purchase
orders that were fulfilled by P&G
Wal-Mart was paying P&G 90 days after
receiving the invoice
As Wal-Mart received its money as soon
as the costumer had bought the product
in the store, this allowed Wal-Mart to
invest the capital and gain additional
financial revenues

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Wal-Mart and P&G

Wal-Mart suggested that P&G would own

the stock in the Wal-Mart stores and
distribution centers, and be notified every
time Wal-Mart sold their product
P&G would be allowed to send a monthly
invoice corresponding to the actual
consumption by Wal-Mart (invoice would
be paid after 90 days)
P&G would be responsible for ensuring
that Wal-Mart always had stock, and it
would be up to P&G to define what the
appropriate stock levels were

The advantage and

disadvantage to Wal-Mart

The advantage was an assurance of

supply and a reduction of its procurement
costs, as Wal-Mart no longer needed to
raise orders and match orders and
invoices
The disadvantage was that it would only
be able to use the funds from the sale tor
the 90 day period

The advantage and

disadvantage to P&G

The advantage to P&G was a better

understanding of when and where their
products were sold, a reduction in order
management costs and reduction in
order-to-cash cycle time
The disadvantage was that P&G now
needed to manage the Wal-Mart
inventories and that they now owned that
inventory