Posted at 11.26.2018
In late 1980's, Procter & Gamble, the manufacturer and Wal-Mart, the distributor started to practice vendor handled inventory (VMI) collaboration. Their success on increasing efficiency of source string immediately trumpeted other corporation like Campbell Soup, Johnson & Johnson, Glaxosmithkline¼ŒElectrolux Italia¼ŒNestle and Tesco, and also Boeing and Alcoa, to use VMI approach.
VMI is a business model which is first implemented and common amongst grocery industry. Supplier or dealer usually refers to manufacturer.
Instead of having the clients, often distributors, to place order to vendors, , as in traditional replenishment process, VMI created a value added service in which distributors have full responsibility on maintaining agreed degree of inventories for marketers. Through VMI software, manufacturers either able to monitor and gain access to distributors real inventory level, or marketers will send sales and inventory data via Electronic Data Interchange (EDI) or internet on pre-arrange schedule, typically on daily basis. Manufacturers then make resupply decisions regarding order volumes, timing, and transport based on mutually arranged stock levels, fill rates, and transaction costs.
Yes, the researcher decided that VMI provides significant benefits to an organization. Therefore, exploring the benefits arise from execution of VMI, would be the next focus for this paper. The newspaper also objectives to look at the disadvantages involved in the application of VMI for both distributors and manufacturers.
The advantages were introduced in terms of manufacturers, distributors, not to neglect dual benefits.
More successful own inventory control
Increased customer relationship
Improved market analysis
Figure 1: VMI Benefits for Manufacturers
Source: The Researcher
Administration cost, functioning cost, travelling cost and so many more are lowered because of lesser order problem like bad data, and reducing surprising order.
This is the quickest advantages as sales could be climb to 5-25%. This mainly due to increased sales of their customers, added by lesser stock out problems, as well as improved product mixture, therefore of better demand presence. Market share also increased because marketers could experience less expensive, greater success, and advanced service from manufacturers. Another factor is better collaborative planning for special sales such as campaign.
Improved market analysis
More consistent and direct communication allowed better insight in customer demand. This enables easier market examination and created opportunities to provide other value added services.
Increased customer relationship
Manufacturers secured its customers by giving continuous supply, staying away from out of stock problems. VMI also reassured long term romantic relationship together with dependable and predictable income as long as manufacturers still taking the duty of preserving a predetermined stock because of its customers, ordinarily a distributor.
More productive own inventory control
With the ability to screen and keep keep tabs on its customer's genuine sales and inventory, manufacturers able to forecast demand, hence better plan and control its own inventory, for example, keeping sufficient stock for developing and resupply for its customer. Increased communication also allows campaign to be easily contained into inventory plan.
Manufacturer's efficiency is increased because monitoring customer's stock regularly enable manufacturers to control its own inventory more efficiently, thus manufacturing operations could be routine more productively.
Lower inventory level
Figure 2: VMI Benefits for Distributors
Source: The Researcher
Lower inventory level
Manufacturers have better responsibility to ensure option of inventories, by buying replenishment when inventories land below order point. Frequent overview of inventories and demand information enable manufacturers to more accurately control lead time element of order point computations, hence reducing safety stock.
Lesser stock-out or shortage
The theory and reasons is merely exactly like for reducing basic safety stock and inventory level, which is automated replenishment by provider before stock-out, and better order computation due to increased awareness of actual demand. Having manufacturers to screen its own items also allows better respond to unexpected demand compared to typical distributors handling bulks of items from different manufacturers.
Administration cost is reduced. Since manufacturers in charge of stock replenishment, the price involves for taking care of replenishment, generating purchase order and other administration task is eliminated. Distributors will require lesser time and effort in placing your order. Cost involved with bad or wrong order is taken away too. VMI also decreased cost of hauling stock.
VMI brings about fewer out-of-stock situations. This simply means higher sales, as lesser sales opportunities are lost, and customer commitment is upgraded. Increased visibility popular guaranteed the right products always available at right time and right place. Frequent communication also allow better collaborations with suppliers in planning new product release, promotions, and exceptional demand, allowing marketers to enjoy full advantage of special sales opportunities.
Having accurate items at correct moment advanced overall service level. Manufacturers rehearsing VMI also willing to provide better service to distributors.
In addition to the above advantages, both manufacturers and marketers benefit from shortening of source chain. Human being data entry errors were prevented through computer to computer communication, which also improve processing speed. Next, overhead is lowered scheduled to automated VMI. Another consequence would be more robust ties and true relationship between manufacturers and distributors. Furthermore, timing of purchase orders was stabilized over a predefined basis, for example once each week purchase order pattern.
The researcher also determined some disadvantages. Firstly, manufacturers may need additional work and cost to undertake resupply activities which is previously carried out by vendors themselves. Therefore, manufacturers must assured considerable amount of gross income and sales to pay those extra expenditures.
Secondly, since marketers are excluded from forecasting demand, inaccurate forecast may occur.
In conditions of marketers, dependency on one source of source gives drawbacks when suppliers unable to meet its determination. Distributors also experienced potential in losing confidential information since manufacturers are given usage of its data. There is also probability of job burning off as replenishment duties are transferred back to manufacturers.
Implementing VMI does mean distributors unable to enjoy bulk purchase discount, campaign, and frontward buying.
Another risk is that lacking of advanced information technology could ends up with outdated and wrong information sharing. Besides cost of technology, program of VMI also involved cost of training and changing firm.
Moreover, the success of VMI is greatly determined by the effectiveness of marriage between manufacturers and distributors. For instance, deficiency of trust in data exchange could brings about ineffective execution, including inventory invisibility and inventory imbalance.
Since VMI increased dependency on both people, switching cost is lifted and these created challenges in switching. Overall flexibility is loss through VMI because special occurrences or special offers required beforehand communication in order to eliminate replenishment oversight.
The next matter is the fact VMI which prompted lower inventory contributed to lack of shelf space at vendors retailing area. This diminishes attention of the purchasers, hence market share are loss.
However, they are really ways to defeat these drawbacks. Take the above example, shelf space could be filled with other items from same merchant. Furthermore, achieving common agreement before making use of VMI would creates mutual trust, therefore strengthens relationship and relationship between manufacturers and distributors, thus better price and exchange, resulted in better service to the end customers, which will then generate significant benefits for both functions.
Procter & Gamble and Wal-Mart is apparently the pioneer and expert of VMI, a source string practice which is popularized among grocery industry since later 1980's.
As oppose to traditional business design where distributors initiate purchasing order, buying decision in VMI are shifted back to suppliers, often manufacturers. That is an robotic process where manufacturers automatically make resupply decision, making sure certain amount of stock is available for distributors to meet consumer demand. Manufacturers receive access to real-time sales and inventory level, where electronic data will be dispatched by marketers to manufacturers through EDI or internet. Under VMI collaboration, both supplier and distributor are bound by contract which establishes information like inventory level, fill up rates, cost, and transport.
The researcher arranged that VMI created numerous advantages of both manufacturers and vendors. Examples include increased sales, cost decrease, lower inventory level, smaller stock-out, improved upon service, improved productivity, improved market examination, shortening of supply chain, improved finalizing speed, stronger collaboration and so many more.
Nevertheless, VMI have cons too. These incorporate additional work and cost for manufacturers, inaccurate demand forecast, dependency on solo source of supply, loss of private information, lack of job, loss of purchase discount, obsolete and incorrect information sharing due to lacking of move forward technology, cost of training, changing organization, increased dependency, increased switching cost, lack of flexibility, lack of shelf space, and loss of market talk about.
As summary, the researcher accepted that VMI could be organised properly in order to increase its advantages and lessen its cons. To illustrate, good move of information is key to success in VMI request. Thus, it's important to allow information sharing by guaranteeing an open communication channel. Applying a well-structured VMI also required good knowledge of VMI as well as training of staff. Other measures to avoid VMI failing includes clarify expectation, and achieve an agreement between manufacturers and vendors regarding factors such as lead time, cost, and information posting.