Vendor Managed Inventory (VMI) is a process where the supplier monitors customer information to keep the customer properly stocked with materials. VMI often gets a bad reputation because historically procurement departments use it to shift cost to the supplier.
This project was different. The overall objective was to reduce the number of manual changes to cross border orders in a 2-stage supply chain. Raw materials were produced in Northern Europe and shipped to Eastern Europe. Trucks transported material from a rail terminal to the manufacturing plant. Variations in their plant ordering practices caused the supplier to incur extra costs due to time-consuming SAP reversals and having to re-submit export paperwork. The added noise added inventory to the process.
The graphic shows the results. At the beginning of the project an average of two rail order changes occurred per week with large inventory variations. Automating the process removed the manual changes and reduced inventory variation. Over the course of the project inventory was removed from the systems to optimize storage and working capital costs.
To manage VMI relationships:
- VMI should be viewed as collaboration between the customer and supplier, not as a cost shifting exercise from customer to supplier. The supplier manages order processing, working capital, transportation, and storage based on the customer supplying accurate and timely inventory, material movement, and demand information.
- Determine the goals of the VMI project upfront, such as whether to add operational and working capital efficiency to a mature, stable process or to improve effectiveness of a process by tackling specific pain points.
- Use a real-time, automated physical measure of inventory, such as telemetry. If inventory accuracy is consistently high, you can leverage an inventory record feed from the ERP system, however manual physical counts are an option, too.
- Minimum safety stocks, demand-variable safety stocks, lead times, manufacturing, and shipping calendars help ensure you achieve service levels and manage risk.
- Synchronize data, ensuring partners use the same units of measure.
- A VMI tool should automate the integration and cross-referencing of data inputs; apply algorithms, business rules, calendars, and lead times; and generate orders. The orders should automatically post to the supplier’s order processing system.
- Be flexible – The VMI tool should accommodate changes in demand or transportation status. For example, a late delivery should be signaled to the system so that it can adjust.
- Do you need multi-echelon VMI? This enables the direct capture of demand data from end customers, allowing intermediate storage facilities to replenish more accurately. The predictive power of this application is that it smooths out demand variation and supports economic order quantities while considering customers’ individual demand profiles.
- Automated business process tools that use exception-based alerting to proactively manage the process enable you to eliminate errors, stock-outs, and emergency shipments. By automating the process, you can roll out standardized enterprise-wide VMI processes and inventory management controls, and scale your operation.
- While VMI may have a large and positive impact, customer service, procurement, supply chain, and sales need to be involved. Some individuals may resist deployment because they don’t understand VMI’s goals, which is why you need proactive change management and project management.
Feature image credit: Jennifer Evans