Best practices for implementing vendor-managed inventory programs

Implementing vendor-managed inventory (VMI) can help manufacturers eliminate excess inventory and run a tighter supply chain. These best practices will help you get started with VMI programs.

Vendor-managed inventory (VMI), which has long been a fixture for consumer goods manufacturers, is increasingly...

being deployed by other manufacturers, who are turning to it to combat problems of excess inventory.

VMI is essentially a type of outsourcing in which suppliers maintain the inventory that the manufacturer needs. It's often used for less critical items, to push the responsibility of keeping stock onto the supplier, according to Anil Gupta, principal of Applications Marketing Group.

The supplier in the relationship owns everything as far as planning and shipping. The customer provides a snapshot of what stock is in the warehouse and how much it's used before. The supplier inputs that stock and usage data into the VMI tool and creates a forecast and replenishment plans accordingly.

Communication with suppliers key to VMI

But entering into a VMI can be challenging unless clear collaboration and communication between the manufacturer and supplier in established to ensure success.

"We like to say that VMI can become a very easy thing to stop doing," said Bob Jennings, VP of sales and marketing at DataAlliance. "If either party isn't getting value, it's an easy thing to stop. Both parties have to be committed to doing it."

VMI implementation is often driven by the balance of power in the manufacturer-supplier relationship. Some manufacturers opt for VMI software when they're pressured from a big customer, like a large retail chain. In that industry, the retailer might be the party with more power, and in others the relationship might be equal.

"In industrial spaces, generally, manufacturers tend to be larger than their customers and can have more say," Jennings said. "The power a company holds in a particular channel has a big influence on what will be adopted."

Maturing cloud applications may eventually help level the playing field between small manufacturers and huge suppliers, according to Jason Howton, director of product management for TAKE Supply Chain. The cloud could act as a central platform between the two companies involved in VMI, allowing integrated inventory information and better visibility and communication all around.

"It's an ecosystem of people working together as opposed to a traditional on-premise solution that the buyer bought and the supplier has to use," Howton said.

But in the meantime, organizations can ensure they're getting the most out of their VMI relationship by adhering to strict best practices.

VMI implementation best practices

First, set business goals for the output of the VMI program in advance, Jennings said.

"Encourage all people to have some level of business review on a scheduled basis with the customer to make sure the program is accomplishing all the things both parties want to accomplish," he said.

In turn, be careful to start with the right items, Howton said. VMI traditionally handles low-cost items that don't require inspection and aren't critical to production assembly, he said. Then, the ideal scenario is to allocate space in the warehouse for VMI products in order to manage and determine the ownership of the material more easily.

As products are consumed, it's key to communicate that back to the supplier to show when the ownership change happened.

Demand visibility is also essential to a working VMI program, according to Gupta. Suppliers need accurate demand information from the manufacturer to do a good job optimizing inventory.

"The key to using VMI is to be able to clearly articulate demand," Gupta said.

VMI closes gap between supply and demand

Manufacturers and suppliers in turn must have honest conversations about the benefits of VMI and make a corrective plan if necessary, he said. Sometimes a vendor may not be as prepared as its VMI partner would have been. It's critical for the supplier to make sure it has enough but never too much.

"People should worry about trying to become overzealous in VMI," Howton said.

VMI is all trending toward connecting demand more tightly to supply, tying demand signal and real demand vs. forecast directly into the replenishment and manufacturing systems, according to Mark Averskog, director of solution management for SCM at SAP. This might include feeding store-level point-of-sale data directly into distribution centers and warehouses to optimize shipments.

But VMI is unlikely ever to be a tool that can be set up and forgotten.

"Both of the companies [involved], whether supplier or distributor or retailer, will go through changes," Jennings said. "It is something that requires a constant interaction and continual improvement."

About the author: Christine Cignoli is a Boston-based freelance writer who covers IT infrastructures and storage technology. She is a regular contributor to SearchManufacturingERP. Contact her through her website.

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