Perceptant
Managing your inventory in an effective and efficient manner is a goal that many businesses continue to strive for. One such idea that has been developed and is now in full use is the vendor managed inventory (VMI) system, which if implemented correctly can drive distinct competitive advantage.
Without further ado then, let’s look at how VMI has evolved, its business advantages and how it could play an important part in an effective inventory optimisation program.
The History of Vendor Management Inventory
Historically, FMCG companies, retailers or manufacturers would watch their inventories dwindle and when the inventory was close to being completely gone, the company would order more. This led to a lot of stock out costs; defined as the lost revenue a company faces because it is unable to fill customer orders.
Some organisations evolved though and began guessing when their inventory levels were going to run low and ordered more just in case. The really smart companies started tracking their inventory sales and looked for patterns and trends. They developed an overall inventory system with certain reorder points. At these points the retailers would automatically send an order to suppliers and hope that they had enough to meet demand.
Even with these new processes, companies were still experiencing stock-outs, leading to unhappy customers and missed sales. To counter this, these organisations decided to keep an excess of inventory on hand, usually in the back of the store. This kept customers happy, but it led to incredibly high inventory costs. As if the pendulum had swung too far one way, the idea of just-in-time inventory (JIT) was developed. This would drastically cut inventory costs and the idea was to always have stock on hand when needed.
JIT was superb for most companies, but it kept suppliers hopping. Trading partners were never sure when retailers were going to order; so it was the suppliers who had to keep excess inventory on hand.
As with many supply chain management initiatives, a little communication goes a long way. Let’s take for example smart retailers who decided to start sharing information with suppliers so trading partners would stay happy and have a better idea when to start producing goods for the retailers. Retailers and suppliers formed such strong relationships that soon the retailers realised that their trading partners could have the information and decide when to ship the goods so that there wouldn’t be stock-outs. The advent of electronic data interchange (EDI), made sharing information much easier.
Vendor managed inventory was born; retailers had successfully shifted the burden of reordering to the manufacturers. Manufacturers are happy because they know when and what they need to produce and they have a stream of guaranteed sales. Retailers are happy because inventory carrying costs are low as well as stock-out costs (it turns out that manufacturers are really good at keeping inventory at the right levels).
Competitive Advantages of Vendor Managed Inventory
A VMI system shifts a lot of the work away from the retailer or manufacturer to the supplier. This frees up resources for retailers, allowing them to focus on their core competencies.The supplier usually signs a long-term deal with the distributor. This can be extremely nice for the supplier, as it essentially smoothes out income and helps guarantee long-term success. If you don’t believe me, think about how hard suppliers compete to for a vendor managed inventory contract with Wal-Mart.
Therefore, it won’t come as a shock to learn that retailers don’t work with as many suppliers in this way. A retailer doesn’t want to share its information with everyone so it usually only chooses a few trusted suppliers to provide them vendor managed inventories. This simplifies the organisation; although it can be a problem if one of the vendors suddenly goes out of business.
Downsides of VMI
Vendor managed inventory is not a one size fits all solution. It has a few potential pitfalls that can be avoided. Communication, communication, communication is the key as retailers and their suppliers have to be constantly sharing information. If they don’t, then a VMI system will not work.
VMI can be expensive to setup in the early stages. First of all you have to pick out a few trusted suppliers. You may want to audit the supplier to make sure they can meet your company’s demands. Next you have to get some form of B2B messaging system going with the supplier. Finally you have to train everyone how to use the system.
You are sharing your information with a third party. Your company’s competitive advantage may be shared with the manufacturer. Does the manufacturer safeguard that information as well as your company? Will the manufacturer decide that it could just as easily be a retailer and become a new competitor?
Vendor Managed Inventory Software
A retailer and its suppliers will need some form of software to manage its new VMI system. This software can be really expensive, although companies like Perceptant have pre-packaged VMI solutions available via SaaS, which dramatically reduce any upfront investment and ongoing running costs.
In addition, each retailer, manufacturer and FMCG company is different so typically, VMI software companies have to customize the software for almost each trading community and business partnership.
For more information on Vendor Managed Inventory software and solutions for effective supply chain management please visit the Perceptant website – http://www.perceptant.com
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Tags: asda, business activity monitoring, business process integration, EDI, EDIFACT, electronic invoicing, retail supply chain, sainsburys, Supply Chain Management, tesco, Tradacoms, Vendor Managed Inventory, wal-mart
