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Is vendor-managed inventory making a comeback?

Years after falling out of favor, vendor-managed inventory (VMI) is drawing attention as a labor-efficient route to better control over orders and inventory. But like before, VMI implementation has its skeptics.

Is vendor-managed inventory (VMI) on its way back?  It depends on whom you ask.

Touted as a more efficient approach to order fulfillment and inventory management, VMI fell out of favor years ago, according to analysts, because of unreal expectations over what it could actually do.

“The Internet revolution created a fair amount of hype over VMI,” said Paul Lord, an analyst with the Stamford, Conn.-based research firm Gartner Inc. “Expectations were unrealistic and didn’t align with the capabilities.”

Security and data-integrity issues, inconsistent core functionality and a lack of maturity in organizations’ early-stage planning also caused many to walk away from VMI implementation, according to a recent Gartner report.

VMI is a technique for electronically connecting trading partners to facilitate planning and execution of supply chain processes and can involve one-to-one relationships or a larger network, according to Gartner.  In VMI, the manufacturer – not the customer – manages the customer’s inventory. It has five major components:  visibility, connectivity, demand planning, inventory planning, replenishment planning, and performance measurement and analytics.

In its report, titled “The Resurgence of Vendor-Managed Inventory: A Landscape,” Gartner states that retailers have turned back to VMI in part because the recession has caused them to cut back on the staff to do the work. Manufacturers and brand owners are looking to VMI for better control over order quantity and timing and the efficiencies it can bring.

Lora Cecere, a partner with the San Mateo, Calif. -based consulting firm Altimeter Group, agreed VMI has made a comeback – to a degree.  “The answer is yes and no,” Cecere said. 

A lot of organizations that say they do VMI aren’t engaged in “real” VMI, she said. Real VMI occurs when the manufacturer is responsible for the inventory and the orders. “What we’ve really had is more of what I’m going to call ‘lip service’ to VMI,” Cecere said.  “’Give me recommendations on inventory and replenishment, but I’ll make the final decisions,’ says the retailer, but what they’re really getting is free planning.”

For example, companies like Wal-Mart Stores Inc. often use VMI to “offload” the labor associated with planning, and instead rely on the manufacturer in an effort to reduce costs and shift planning onto someone else, Cecere said.  Wal-Mart isn’t the only one.  Smaller grocery chains have gone to manufacturers like Procter & Gamble and said, “You’re a bigger company. Please plan for me.”

Manufacturers that make products with short cycle times and high volumes are also using VMI, according to Cecere. That includes seasonal products like cold medicines and suntan products, where demand is high but unpredictable.  

What are my VMI options? 

Traditional VMI systems were built around extending core supply chain planning functions and installed on the premises, according to Gartner. This meant creating a new database to support customer account data or passing data back to the supply chain planning application. Today, however, there are many more Web-enabled applications that give customers a wider variety of options. 

Cecere recommends buying Software as a Service as opposed to on-premise versions. “Things change so much, and I would be looking at a provider that has flexibility,” she said.

Others had a different take.

David Mackail, who oversees the European VMI operations for a global footwear company based in the  Pacific Northwest, said though it’s uncommon for apparel companies to use VMI, it’s necessary in his market.

“In Europe, we have a lot of smaller customers,” Mackail said.  “Once you get outside of top 20 [customers], the supply chain capabilities are not very good. They’re stuck in the 1970s. Those kinds of customers want VMI because they don’t have the capability to flow the product to the stores themselves.”

Mackail’s company uses a stand-alone, on-premise VMI application that links up to sales and operations systems. “The replenishment algorithms are very simple, but what’s really important is the analytical tools that come with the software,” he said. “You have to be able to have the right tools and the right KPIs [key performance indicators] and the right analytics.”

What’s next for VMI?

Cecere said manufacturers and customers who are interested in VMI implementation should first ask themselves who “owns” the inventory and who owns the order. Once they begin executing their plan, they need to have an idea of what success looks like, Cecere said. 

This initial period should take about six months, she said.  It’s enough time to clean the data, establish the system, and determine if inventory is indeed being lowered, shelf position is improving, and the two sides are working more efficiently and more closely than before.

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