Vector Managed Inventory (VMI) is a means of optimizing Supply Chain performance in which the manufacturer is responsible for maintaining the distributor’s inventory levels (VectorManagedInventory.com). In essence, the manufacturer has access to the distributor’s inventory data and is responsible for generating purchase orders (VectorManagedInventory.com). Under this model, the electronic data is sent to the manufacturer. The manufacturer can view every item that the distributor carries, as well as a true point of sale data(VectorManagedInventory.com). A third-party logistics provider can also be involved to make sure that the buyer has the required level of inventory by adjusting the demand and supply gaps (Tempelmeier 2006). VMI’s chief advantage is that it reduced the logistical burden on the retailer because he no longer needs to keep track of inventory and contact the manufacturer to replace sold inventory. It is an evolution of the Just-In-Time inventory system of the 20th century. Not only can the seller maintain only a minimal inventory, thus reducing his storage costs, but he can also even sit back and leave restocking chores to the manufacturer. The chief pitfall of VMI is that that because it is electronic, the system may not be prepared to deal with sudden changes. Also, it is a long-term learning process, and the most successful VMI systems were the result of years of cooperative development. Finally, it is costly to develop and maintain. This paper addresses both sides of the debate on the question of VMI’s nature as a stopgap measure or as a lasting improvement even when demand returns.
VMI is just a stopgap measure. Ismini Scouras of EBN holds that VMI is a reaction to the inventory glut coupled with the weak business environment that made the previous inventory models unprofitable (Scouras 2002). This author believes that VMI will expire in the face of renewed demand once the global recession is over. VMI only works because of the current economic climate. VMI is just a stopgap measure for suppliers to generate sales and profits as the growth rate for new orders continues to languish (Scouras 2002). For as long as the economic environment is that of oversupply, the VMI system remains feasible. At the moment, the program is feasible because of fierce competition between suppliers for very limited demand. The status quo means that suppliers need to provide extra services like VMI in order to differentiate themselves from competitors. However, once demand recovers, OEMs and EMS providers will most likely rely even more heavily on their partner’s VMI programs in order to avoid ending up on allocation. Suppliers won’t have a need to distinguish themselves from their competitors based on services and instead will take business from any paying customer as soon as shortages hit the market (Scouras 2002). To summarize the arguments for VMI being a stopgap measure, VMI is a stopgap measure because it is merely a reaction to the global recession, and suppliers need to seek new ways to differentiate themselves from other suppliers in order to attract customers in a Bear market. When the market demand returns to normal, VMI will become unnecessary to the suppliers and will just be an added expense.
The opposite argument can be summarized by the fact that VMI works. VMI is an improvement on previous systems of inventory management and will stay even after demand picks up. The success enjoyed by companies that employ VMI is worth nothing. For example, when ST Microelectronics N.V. and Hewlett Packard began using their VMI system in the summer of 2001, they claimed that the VMI program cut their product lead time in half, reduced buffer inventory from five to two weeks, and eliminated 80% of manual transactions (Shah 2002) While it is worth noting that the success that ST Microelectronics and HP enjoys is the product of two years of close cooperation, this does not detract from the fact that their cooperation has made their inventory management systems much more efficient. Sun Microsystems has also employed VMI to their great benefit. Half of its $350 million fiscal year inventory reduction is a direct result of the new VMI system (Shah 2002). In an increasingly competitive world, a more efficient inventory management system might just be the seemingly minor competitive advantage that can spell the difference between success and bankruptcy. Where the World market more and more competitive, VMI and the improvements it brings may be the only way that companies will be able to differentiate themselves from other providers.
With both sides of the argument presented. I am of the opinion that VMI will remain. The core support for this stand is that VMI represents a quantum improvement over past practices. It automates a laborious and time-consuming process allowing companies on both sides of the supply chain to either reduce personnel and costs in their inventory management systems. Second, VMI provides a competitive advantage that is hard to replicate by employing alternative inventory management systems. The lean inventory and automated restocking it offers are certainly very useful, especially for larger firms. Third, for firms already employing VMI to abandon it just because supply has picked up does not make much sense. This would be tantamount to abandoning an advantage for little apparent reason. As companies have already spent significant resources developing their VMI system, it would be unlikely that they would end such practice unless there was a compelling reason to do so. In summary, VMI will remain because it has already provided a useful advantage to companies employing it, and those same companies will have little to gain by abandoning the practice.
Works Cited
- Vector Managed Inventory.
- Tempelmeier, H.. Inventory Management in Supply Networks – Problems, Models, Solutions, Norderstedt:Books on Demand The Success of VMI Programs Depends. Ismini Scouras, EBN, 2002.
- ST, HP VMI program hitting its stride. Jennifer Baljko Shah, EBN, 2002, Issue 1309, p. 42
- Sun clears out inventory costs through new supplier program. Jennifer Baljko Shah, EBN, 2002, Issue 1305, p. 1
Outline
I Introduction to Vector Managed Inventory.
A. What is VMI
B. What are its benefits / pitfalls
II. VMI as a stopgap measure
III. VMI as a permanent fixture
IV. Decision / Conclusion: VMI will stay