Introduction and History
Supplies to firms contribute to high costs, which eventually affect the competitive position of the firm. Firms have, in turn, adopted supply chain management practices to enhance the efficiency of their supplies-related costs and thus improve their positions competitively. Vendor Managed Inventory (VMI) programs are one of the tools that firms use to achieve synchronisation of their supply chain.
Vendor Management Inventory is defined as a distinctive storing that mainly focuses on the customer, and which uses Server Valuestreamguru. It varies from the other supplies management systems in the sense that ownership is maintained to a point where the item is not entirely finished or consumed (Dejnega 63).
The VMI approach was first introduced in 1985 by leading US retailer chain WalMart and manufacturer Procter and Gamble. This system did not only help the firms improve their supply chain, but it also enabled them to fix their positions as market leaders.
The system particularly helped WalMart to track supplies to its stores as an alternative to the replenishment process that was previously adopted by the firm. The initial system was time wasting and failed to effectively cater for the requirements of customers all at once (Dejnega 62).
Advantages of the VMI Approach
The VMI approach helps firms to reduce the amount of inventories that they hold at any one given time, while also improving on their service delivery.
The approach aids this in numerous ways, both when the vendor is expected to replenish several customers existing in close proximity and when a single customer expects to be served with several products. The vendor may consolidate the numerous product orders such that only a single shipment is needed.
Orders may also be consolidated easily as a result of using the VMI system of supplies (Salzarulo 2). This can be achieved when the supplier times the dates when inbound shipments will be received and coincides them with the outbound shipments schedules. This would eventually enable the supplier to cut down on the actual inventory that is held on the site.
Vendors are able to achieve on-hand inventory allocation amongst the customers by virtue of using the VMI approach. This particularly becomes applicable at the time when the supplier replenishes several customers. Instead of sending fixed quantities to the customers at every shipment, the supplier may opt to vary the supply size during each shipment.
The bullwhip effect is significantly reduced by adopting the VMI in supplies. This often occurs when order fluctuations are increased to the higher supply chain echelons. The bullwhip effect results in an inefficient use of the inventory as well as the manufacturing capacity.
This is because increased order variability results in two scenarios, which include additional manufacturing capacity in order to provide sensible response times or added inventory to cushion against the biggest orders.
As Salzarulo (3) points out, there is sharing of information within a supply chain that is coordinated and some bullwhip effect causes are eradicated, thus resulting in lowering the supply chain’s uncertainty. It also leads to increased efficient resource utilization.
Disadvantages of VMI
Firms find it a challenge to implement VMI to its utmost potential. This often results from the fact that manufacturing planning systems fail to utilize consumer demand information. Additionally, supply chains do not have a standardised product identification, which prevents the VMI from operating successfully.
There is a variation between reality and assumption, which ends up affecting VMI’s performance and effectiveness. One such factor is the specific environment within which VMI is implemented.
For instance, vendors may be required to customize their supplies such that they may accurately fit into the demands of the customers. This, in turn, eliminates one of VMI’s prime benefits, which involves the allocation of items amongst the customers (Salzarulo 4). The consolidation of shipment in VMI may also be realistic in actual sense.
The intended success in implementing the VMI is dependent on the prevailing bonds established among vendors and retailers. Where such relationship is strained, there will be little chances of the resultant VMI being successful in terms of reducing costs and increasing efficiency.
For VMI to be greatly successful there is need for the parties to exchange data, some of which may be considered too sensitive. This will occasionally see firms lacking trust with their partners refusing to give out details concerning their operations.
VMI Strengths
At the supply chain level, VMI has the ability to reduce the amounts of inventory that are held by the firm. It also results in less overhead costs, limited errors associated with human data entry, and increased sales levels overly.
To the vendors, it provides them with the capability to enjoy better insight in as far as customer demands are concerned and improves direct communication with the customers. The market analysis by vendors is also improved as a result of VMI, while increasing their ability to offer category management, as well as other value-added services.
Some of the advantages that come with VMI include reduced replenishment durations for suppliers. Inventory costs that are associated with supply are also reduced considerably. The suppliers enjoy less redundancy and increase sales owing to reduced stock outs. The end-users, on the other hand, enjoy increased service levels and minimised instances of stock outs.
VMI Weaknesses
The main weakness for this approach is the fact that it has an insufficient visibility concerning the entire network of supply in some instances. While VMI’s performance will be excellent in an instance where large quantities of products that are frequently replenished are supplied, its performance in case of high level demand volatility leads to excessive inventories.
Equally, VMI’s performance is only better where the effort of the manufacturer plays a critical role in influencing consumer demand, as well as during instances where consumers are least expected to go for substitute products during stock-outs. However, in such cases where substitution is found to be attractive, dependence on VMI could result into poorer performance (Olson and Deshrng 54).
VMI Overview
VMI seeks to manage as well as control the third party firms that deal with a company by way of supplying goods or the services required. VMI has set out goals, which an organization has to ensure that as it searches for third party business partners, these set out goals are observed. The main objectives of VMI include achieving high quality service, reduction in costs, and the satisfaction of goals as intended.
VMI Goals
Establishing goals
The operations of the firm must be desired to attain a certain goal, which will be beneficial to the firm. Thus, these goals must be set out such that they will form the determining factor in the decision-making process of the firm, including during the process of selecting and managing vendors.
Managing vendors
There are a number of control mechanisms that a firm is expected to closely monitor in order to ensure success. These include monitoring the performance, initiating new projects, offering feedback information, and manage the control processes. Additionally, firms are expected to develop their vendors in various ways. The VMI determines all these aspects, and acts as a plan for the managers.
Vendor selection
Firms require dealing with vendors who match its own capacity of requirements. Thus, VMI establishes some of the strengths that the firm needs to observe while selecting the choice of vendor firm. These leads have been matched with the firm’s own internal requirements and capacity and thus managers are expected to observe them fully to avoid limitations in performance.
Consistency in meeting goals
VMI establishes statistically acceptable limits, both the upper and lower thresholds, which will enable the firm to achieve its target. The vendor manager has been provided with accurate measures and actions, including making sure that their selected vendor employ an adequate number of staff. These guidelines have to be followed to the latter to avoid a scenario where the firm will find itself missing its targeted objectives.
Market Analysis
Systems used by main suppliers
One-supplier one customer
Often, a VMI system depicts a one-supplier one-customer relationship. However, in real life situation, there are models that exist that comprise of numerous suppliers, distributors, wholesalers, and manufacturers.
In a one-supplier one-customer kind of a model, the minimum and maximum inventory amount is established by the customer. A penalty is paid to the customer for every supply unit that is made by the supplier, which falls outside the established limits. Both the customer and the supplier are aware of the demand distribution that the retailer requires.
The supplier produces the customer’s demands without the capacity limit. In order to ensure that the demands of the customer remain consistent with the available inventory levels, the supplier is allowed to outsource.
The penalty by supplier, however, is not incurred in an immediate situation, such as being incurred every day. Instead, they are determined over a long-term period, like after one year. This is done as part of the balanced score card assessment.
One-supplier multiple consumers
In this system type, both parties comprising of the supplier and the customers incur costs accruing from inventory and backorder. VMI does not offer any guarantees to synchronize the partners, not unless they agree to or recompense fixed transfer payments.
According to related studies by Cachon (658), VMI under this particular system fails to offer any improvements in as far as the supply chain costs are concerned in forbidden fixed transfer payments.
VMI Comparison and Evaluation: UAE vs. International level
TVH
Local application of VMI for TVH in the UAE mainly involves the firm utilising its supply chain for the numerous department stores that are located within the country. The department stores each have their own separate inventory policies. The lead-time for production of a single item takes five days. On the other hand, the finished goods inventory on average take 8 week, with about two weeks involving safety stock.
Order management
TVH mainly rely on e-commerce in managing its supply chain. The firm has set up a dedicated order capturing screen that provides an opportunity for the call centre representative to make full reviews of the customer’s position.
TVH representatives are in a position to check the business relationships as well as contacts based on varying criteria, including suspect, prospect, contact name zip code, city, and phone, among other details. The website is capable of integrating the website for such details as the product catalogs, sales orders, price lists, and the customer’s addresses and contacts.
TVH also uses several POS systems for conducting customer returns, sales orders invoices, sales orders payments, customer’s contacts, and transfer order receipts. The POS system also integrates for transfer order receipts, inventory updates, and transfer order shipments, among many other services.
Supply chain management
The e-commerce system enables TVH to manage varying vendor contracts and a host of other vendor-related information, including bonus and rebates, management of the vendor calendar, vendor backorders management, as well as automated cross-docking and drop shipping notices.
TVH’s VMI integration allows the firm to consign inventory to customers through use of invoicing and periodic consumption. The firm defines a warehouse for every customer site and the minimum stock levels forecasts are used to establish the needs from the main warehouse.
The transfer orders used for issuing supplies to the VMI warehouses automatically get created, while the automatic stock availability control is undertaken by the main warehouse. The stock needed by a customer creates the necessary sales orders automatically, deriving the details from the VMI warehouses’ consumption.
V-Line Europe
At the international level, the practice comprises of determining plant demand. This is done by evaluating the combination of MRO needs, which keep changing on a regular basis. The MRO needs reflect on “the stock room reorder, the high-use wear parts, the emergency parts, as well as spot buys of items that are rarely used”. It also involves the scheduled maintenance projects.
From the time when the order is placed until when the delivery is done, V-Line service is directly involved, and it takes title to the related MRO flow. Different goods are acquired from the numerous suppliers and put at the firm’s consolidation warehouse. Preparations are thereafter done concerning export, overseas transportation, as well as import country handling.
In order to effectively manage how the goods flow and how transactions are done, V-Line uses modern information technology and communications links. Its computer systems have been linked together with those of the supplier firms through server systems on both ends. Communication is also established with the logistic vendors and the receiving customer plant through the use of computers and servers.
V-Line boosts its VMI capability by making sure that the firm stays ahead in terms of offering quality services at an affordable fee. Moreover, the firm goes to the length of meeting the needs of the subject plants. This is a critical factor for the firm as it has enabled the optimization of cost and also enhanced the performance benefits.
V-Line Import Logistics
V-Line tracks the arrival dates at the country of destination and clears customs, import, together with transportation to the central point or the final receiving point. Where deliveries are to be made at a central location, the firm determines a warehouse location where deliveries will be made either on an express basis or through Just in Time (JIT) delivery.
Documentation is done to reflect on the inventory level as well as to indicate the transfer ownership. The transfer of currencies is then undertaken, supported by all the necessary legal requirements. V-Line Services accepts payments that are done using the local currency and at the local address.
V-Line Export Logistics
The export logistics carried out by the firm begin with the acknowledgement of the vendor order before follow-ups are done. This helps in expediting transportation of materials to the V-Line warehouse.
At the warehouse, receipt control is done together with undertaking item labelling and item inspection. The firm’s representative in charge signs a notice of inspection once the confirmations are done.
The next process involves item consolidation scheduling, particularly for the consolidated orders shipments that appear within fixed intervals. The materials destined for export are packed in readiness for either container transport or airfreight.
The documentations are done for purposes of meeting the customs requirement and the destination-country requirements. The materials are thereafter loaded onto the carrier pickup and V-Line Services indicates its partners both for insurance and financial needs.
A consolidated invoicing is done as proof of payments made by the client for the delivery of goods. The last stage in the export process involves the firm making the payments to the material vendors. Transportation takes two days between the firm and the department stores, while the stores take another day for receiving the goods.
Trends, Perspectives, and Recommendations
Firms are generally shifting the responsibility of managing their inventories to the suppliers. There is growing need for firms to enhance their competitive position by limiting their operation costs as much as possible. As such, the adoption of lean supply chain systems, such as VMI, is taking preference.
Although the adoption of highly efficient supply chain system is growing in demand, there are also emerging challenges in the area. VMI, for instance, is highly integrated with information technology.
With the continuous advancement of IT, there is growing need for firms to employ skilled personnel who will have the ability of advising the management appropriately in the area of supply chain systems. This will help to reduce expenditure as well as improve efficiency to a greater extent.
Conclusion
Vendor Managed Inventory (VMI) is a system of managing inventory in a firm such that the costs involved can be maintained at low levels. The ability of a firm to maintain limited inventory costs enables the firm to achieve greater competitive position, which is critical for the growth and advancement of a firm. VMI mainly seeks to achieve strategic partnership and relationship between the firm and its third party business partners.
The benefits of VMI for include enhanced efficiency, low inventory levels, and highly efficient supply chain. VMI system can either be such that a single supplier deals with numerous companies, or a single supplier dealing with a single customer. In both models, the partners into an agreement such that the supplier is strictly expected to determine the demand levels of a customer and offer to fulfil it without any fail.
TVH mainly relies on e-commerce for managing both its supplier networks and order placements. Through internet connectivity, the firm tracks order placements from its customers and scrutinises all the details through the click of a button, before servicing. On the other hand, V-Line Service relies on an elaborate export and import logistic to undertake its international business.
Works Cited
Cachon, Gerald P. “Stock Wars: Inventory Competition in a Two Echelon Supply Chain.” Operations Research 49 (2001): 658-674. Print.
Dejnega, Oleg. “Vendor Managed Inventory and Relish of Both Partners.” Annals of the University of Petrosani Economics 11.4 (2011): 61-72. Print.
Olson, Davis and Deshrng Wu. Enterprise Risk Management. Singapore: World Scientific Publishing Co., 2008. Print.
Salzarulo, Peter A. Vendor-Managed Inventory Programs and their Effect on Supply Chain Performance. Ann Abor, MI: ProQuest Information and Learning Company, 2006. Print.