Baily et al (2005) defines Vendor Managed Inventory as “a collaborative strategy between a customer and supply to optimize the availability of products at a minimal cost to the two companies. ” Van Weele (2005) defines Vendor managed Inventory as “a continuous replenishment program that uses the exchange of information between the retailer and the supplier to allow the supplier to manage and replenish products at the store or warehouse level. ” Traditionally, inventories are managed by owners of a retail operation. When the inventory level is low, the shop manager has to decide to replenish the inventory.
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He therefore contacts the suppliers. This involves a lot of paper work as well as labour to tell that the inventory is on reorder level. But when the retail operation is automated, the supplier and the retail operation systems are linked up usually via Electronic Data Interchange (EDI) or the Internet. The supplier receives electronic data from the retails operation in regard to stock levels of their product. Thus, the supplier is able to view the sales that of the retail operation regarding their product therefore enabling them to create and maintain an inventory plan.
Under Vendor managed Inventory, the supplier is responsible to generate orders and not the retailer. This requires extensive sharing of information so that suppliers can maintain a high degree of visibility of its products at the retailer’s location. Instead of the retailer reordering as in the traditional way, the supplier is responsible for replenishing and stocking the retailer at appropriate levels. This can not just happen but rather the retailer needs to enter into a collaborative or partnership agreement with the supplier under which the supplier agrees to stock a specified range of items and meet specified service levels.
The Benefits of Vendor Managed Inventory There are a number of benefits of VMI for both retailer and supplier. Benefits to Retailer ?Stock-outs which lead loss of business are avoided as the supplier monitors the stock levels of the retailer. ?Costs are reduced in regard to administration of the product since there will be no need to monitor inventory levels, paper to computer entries are reduced and reduced re-ordering costs. ?The working capital is enhanced due to reduced inventory levels and obsolescence and enhanced stock turn with improved cash flow.
Capital is not tied up in stock thereby enabling the retailer to concentrate on other areas. ?Lead times are reduced with the enhanced sales and a reduction of list sales due to stock outs. Benefits to Supplier ?Long-term customer relationships dues to the high cost of the retailer switching to an alternative supplier. ?Demand smoothing. VMI information improves forecasts of retailer’s requirements thereby enabling suppliers to plan production to meet demand.
VMI arrangement will allow the supplier to schedule its operations more productively because it is now monitoring ts retailer’s inventory on a regular basis. Vendor Managed Inventory is not only beneficial to retails and suppliers but also the supply chain as a whole. These include management undertaken by whoever is best positioned or qualified, a smoother flow of materials, an enhanced flow of information, simplified administrative procedures and the placing of the competencies of the supply more firmly with the supplier.
These drawbacks are: (a)EDI Problems. VMI involves the use if intelligent terminals and other gadgets like bar code scanners. These are likely to breakdown at some point in time thereby rendering communication breakdown between supplier and retailer. This could result to stock outs. EDI also sometimes creates a challenge due to the many different standards in use. This makes it difficult to communicate and translate information between organizations. (b)Acceptance VMI concept may face resistance from employees of both retailers and suppliers.
A human being is naturally afraid of trying new things and therefore resists change. The use of technology has seen organizations laying off staff because the work that was being done by the staff is now done through machines. Members of staff could therefore not accept the concept in fear of losing their jobs. It is therefore important to make sure that all employees involved in the process fully understand and accept this new way of doing business. Its not enough just to sell the concept to senior management, all employees who are involved must be willing participants. c)Trust among the supply chain partners. Retailers could not be willing to share its information with suppliers.
Many retailers and suppliers are naturally reluctant to share information in advance, fearing that the information will somehow fall into the hands of competitors or they will lose control in some way. (d)There is also transfer of customer costs to the supplier. These costs include relating to administration and the cost of carrying increased inventory to meet customer demand. The supplier may not be willing to take the responsibility of these costs. e)There is an increased risk on the retail operations resulting from dependence on the supplier. If the supplier face hiccups in operations, the retailer is likely to be affected by stock outs.
