Vendor Managed Inventory VMI Term Paper

Excerpt from Term Paper :

Vendor Managed Inventory

Supply Chain And Operations Management:

Supply chain management is a major concerned of all large and small firms in today's highly unpredictable business environment. While the buyers or distributors are worried about timely deliveries of products and efficiency of products, manufacturers are more concerned about how their customers judge demand and place orders. This is because unpredictable changes in demand can force the customers to place orders for products whose production level has not yet been increased. For this reason, supply chain management has become a major issue.

Supply chain management sounds like a complex series of integrated activities but it all boils down to one simple end i.e. customers must always have the items as and when required. Roger Blackwell, a professor of business studies at Ohio State University and acclaimed author of quite a few best-selling books on the subject of supply chain says, "Supply-chain management is all about having the right product in the right place, at the right price, at the right time, and in the right condition." (Tom Stein and Jeff Sweat, 1998) It is extremely important to understand what constitutes a supply chain in order to understand the significance of emerging operations management methods. This chain helps in efficient and smooth overall operations of the company and thus must be in coordination with its policies and management strategies.

Ram Ganeshan and Terry P. Harrison (1995) define supply chain in these words: "A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm." (Ram Ganeshan and Terry P. Harrison, Department of Management Science and Information Systems, Penn State University, 1995)

Changing nature of supply chain management

Supply chain thus occupies a very important place in the management of the company and its efficient implementation is usually the biggest of most organizations. In the modern business world of today, supply chain management is no longer connected with movement of products from manufacturer to customers. It has become highly complicated because of the unpredictable nature of demand and intense emphasis on customer service. Many companies are trying to make use of emerging technologies to develop a more efficient supply chain. This is where we encounter new management methods, some of which focus on certain sections of the supply chain and not the entire chain.

The four important decisions made in this connection are associated with location, production, inventory and transportation/warehousing. With changes in the business environment and more stress on customer service, it is important to address each section separately. Not only this, companies are also required to develop more harmonious relationship with various intermediaries of the supply chain. Better collaboration can lead to more cost efficiency and improved customer service. This can later have a profound impact on the operations of the company including its management strategies. For this reason, we must accurately assess the changes in the business environment including subtle changes in demand patterns. This helps in developing and adopting a better operations management strategy. Commenting on the changing nature of supply chain management, Tom Stein and Jeff Sweat (1998) write:

Many critical elements make up any successful supply chain. First, companies must learn to trust their business partners -- an enormous psychological hurdle. There is a very real -- and sometimes justified-fear that information sharing can turn into a competitive disadvantage. But supply-chain partners that exchange information on a regular basis are able to work as a single entity. Together, they have a greater understanding of the end consumer and are better able to respond to changes in the market place. These companies also realize they must harness the power of technology to collaborate with their business partners as never before. That means using a new breed of supply-chain management applications -- and the Internet and other networking links-to look at past performance and historical trends to determine how much product should be made, as well as the best and most cost-effective methods for warehousing it or shipping it to retailers." (InformationWeek, 1998)


Vendor managed inventory refers to relatively new supply chain management method in which consuming party or buyer's inventory is maintained and monitored by the supplier. Some well-known firms adopted this method in the 1980s and its success indicates that it is an effective and efficient manner of controlling and maintaining inventories. Vendor managed inventory is also known as supplier managed inventory and as the name indicates it is the supplier a very important role here. The vendors keep an active record of the inventories of their distributors or buyers and make supply or purchase orders on their behalf. Supplier can be a manufacturer or reseller but the fact remains that he is the person who is responsible for keeping an eye on inventories of his buyers either by physically or through electronic means. Supplier then makes all the decisions regarding new orders including timing and size of the purchase order. This system has helped some major companies like Wal-Mart and Johnson increase the efficiency of their inventory system.

New operation s management systems are needed because suppliers and buyers want to be better prepared to satisfy the needs of a new more demanding customer. Customers are no longer interested in buying only a product; therefore they keep a watchful eye on the service offered by the company. In other words, they purchase both the product and a service. For this reason, it is important for companies to adopt strategies, which are customer-oriented, and not me merely profit-centered. Suppliers and distributors thus understand the growing need for smoother and more efficient operation management and thus better supply chain management techniques are being rapidly adopted. Heather Harreld (2001) explains:

Manufacturers and suppliers are abandoning their traditional adversarial relationships characterized by price haggling and hedging bets on product orders in favor of a collaborative-commerce model designed to be mutually beneficial. To pave the way for these new alliances, vendors are rolling out enhanced supply-chain planning and forecasting tools and SRM (supplier relationship management) technologies that provide real-time access to the demand, inventory, price, sourcing, and production data to be shared by manufacturers and their suppliers. This evolving collaborative-commerce paradigm has resulted from the balance of power in business relationships shifting to the customers, be they manufacturers or end-users, says Jeff Shuman, a professor ad director of entrepreneurial studies at Bentley College in Waltham, Mass., and co-author of Collaborative Communities: Partnering for Profit in the Networked Economy. "Because you have an empowered customer,... To satisfy that customer now companies realize that they can't go it alone, because the demanding customer won't settle for things they used to settle for," Shuman says. "The customer is saying, 'I want to sit at the table and collaborate with you.'" (InfoWorld, 2001)

VMI is a form of outsourcing, which has not gained rapid acceptance because of various reasons including use of similar electronic data interchange and bar codes formats. The retailer or manufacturer usually expect the buyers to adopt these measures in order to make VMI system more efficient but not every company has been able to comply. This is the reason VMI is still in its infancy and it is believed it would take few more years to grasp and embrace this supply chain management method completely.

Companies that are adopting this system are noticing a marked change in their inventory efficiency; still we cannot exactly call this system problem free. For one all item details have to be properly communicated to the supplier with increase or decrease in prices due to promotions and sales. Grocery stores thus face more problems than other sectors because the amount of products involved can sometimes hinder the process of data transmission to the supplier. This is one reason why its adoption in grocery stores has been slower than in other sectors. Some suppliers also face resistance from buyers and distributors who lose control over their own inventories once VMI is implemented. But benefits of VMI are numerous which is why it is likely to become a solid alternative to lengthy supply chain management systems currently operating in large firms. VMI can shorten the supply chain and also reduces the risks of item shortage. Centralized forecasting helps in controlling the frequency of reorders.

Commenting on this new system and its key features, Riikka Kaipia and Kari Tanskanen from Helsinki University of Technology write:

VMI is an operating model in which the supplier takes responsibility for the inventory of its customer. In a VMI partnership, the supplier makes the main inventory replenishment decisions on behalf of the customer. The supplier, which may be a manufacturer, reseller or distributor, monitors the buyer's inventory levels and makes supply decisions regarding order quantities, shipping and timing... However,…

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