Vendor Managed Inventory - Research Paper Example

Vendor Managed Inventory Vendor managed inventory is a type of business model. In this model, the buyer of a product gives certain information of the product to the supplier and from there the supplier takes over the complete responsibility of managing the inventory of the material. Most of the times it is at the buyer’s consumption location. A third party logistics can also be roped in at times to ensure that the stipulated level of inventory is maintained at all times and adjusted according to changing supply and demand. A symbiotic relationship exists between the vendor and the vendee. In this way, vendor managed inventory ensures that the stock levels are maintained at all times and the business is never out of stock unintentionally. It also reduces the inventory in the supply chain and henceforth the overall cost of maintaining and keeping the inventory. There are various other advantages associated with this relationship to the vendee. The vendor ensures that the products are displayed in the shop properly and the staff is well informed about the various features of the product line. They also help to clean and organize their product lines for the store. Shared risk is one of the keys to a successful vendor managed inventory. If the inventory does not sell, the onus is on the supplier to repurchase the product from the retailer. In other cases, it is otherwise. There the product rests in the possession of the retailer but he does not own till the sale takes place. This means that retailers are simply houses and platforms to assist the sale of product. This is in return for a pre-determined commission or profit. Scan based trading is a special form of this commission while VMI is mostly applied and not mandatory to be used. Big wigs like Wal Mart have successfully used this model. Some of the oil companies have also used this model. They use gasoline inventories at their service stations that they supply for instance Petrol Soft Corporation. Home Depot uses the same technique with other big suppliers of manufactured goods. These include the likes of Moen, Delta, RIDGID and Paulin.VMI helps trigger a better understanding between both the supplier as well as the manufacturer. This is via its use of Electronic Data Interchange formats, use of EDI software and various other statistical methodologies for forecasting inventory purposes in the supply chain. Advantages of Vendor Managed Inventory: The advantages of Vendor Managed Inventory are manifold. It benefits the distributor as well the manufacturer and some advantages are dual. It helps prevent data entry errors. This is because communications are mostly computer to computer in this form of inventory management. It greatly increases the speed of processing as well. The aim of both parties is unananimous. They both want to provide better service to their customers. Maintaining the current item in the stock as and when the customer needs it, benefits all the involved parties. A true partnership exists between the Manufacturer and the Distributor. Their ties are strengthened as they come closer to work together. In this type of relationship all three types of stakeholders benefit, the vendors, the customers and the suppliers. The vendors benefit from more visible control of displays and more contact to impart knowledge to employees. Retailers enjoy the advantage of reduced risk, training of their staff and reduced maintenance over head... On the other consumers too benefit. They benefit from a well groomed and well informed staff who and are in constant contact with vendor representation whenever their service is required. They are sound in their knowledge of most product lines, offered by all the vendors and this will help them make the best choice when deciding amongst the best product from many products in a product line. At the distributor level, there are numerous advantages as well. The fill rates from the manufacturer to the customer are improved. There are no stock outs and reduction in inventory levels keep the costs down. The planning and ordering overhead is no longer his headache. The responsibility now rests with the manufacturer in such a set up. The overall standard of service improves massively. This is because the right product is available at the right time. The manufacturer stays focused on improving upon his service. In such a setup, the distributor’s Point of Sale data is clearly visible and accessible at all times. This makes forecasting more efficient and easier. Promotion plans can be easily introduced into the overall inventory plan. Because the stock levels are visible it becomes very easy to categorize stocks. What are the priority items on the list? Is there a stock out needed. Will the stocks have to be replenished? When will they have to be replenished etc? Such questions can be easily answered. Because, the vendor is primarily responsible for supplying the customer, the items when they are needed, it removes the overhead on manufacturers end for maintaining safety stock. It also gives rise to significant cost savings as the inventory levels are level. The purchasing costs for the manufacturer also come down in such a setting. The purchasing department does not have to invest a lot of time in calculating and producing purchase order. At the same time, it also eliminates the need for corrections and reconciliations which in turn further brings down the purchasing costs. Cost savings are also visible in low warehousing costs. Warehousing maintenance overhead is no longer the manufacturer’s head ache. Conclusion: Inventory management by suppliers continues to attract attention in various industries. The advantages of vendor managed inventory have been already discussed in the paper. The operational benefits of Vendor Managed Inventory are far reaching and impactful. The overall cost of implementation of VMO includes investment in technology and in the creation of organizational structure that will support this platform. However a lot of costs of investment in technology have slowly and steadily started declining. For instance EDI implementation with trading partners is increasingly becoming less expensive especially with the availability of Internet EDI software. A careful review of our analysis demonstrates that this approach works immensely in bringing down the overall inventory level for all participants involves and hence keeps a strong check on the inventory costs associated with it. Surprisingly, the benefits of VMI implementation go down to the non-VMI customers of a particular manufacturer as well. The fact that VMI induces inventory reduction is well known by now. Most of this reduction can be attributed to frequent inventory reviews undertaken, order intervals and deliveries that make this approach. There are various frontiers in this kind of supply chain management that can be opened for greater co-ordination and can be exploited in sophisticated ways. This will help increase the overall value generated by Vendor Managed Inventory. Fluctuation in demand has no role in deterring the potential benefits. Those businesses with high and low volatility of demand are able to benefit at the same level. Consumers willing to participate in this kind of relationship and partnership can take advantage under all conditions. There are greater benefits to the manufacturer under specific circumstances. For instance, benefits are the greatest and biggest with widespread adoption of VMI. Even if the rate of adoption is low and little, they are considered to be significant. Similarly, the manufacturer can increase his capacity utilization. The VMI approach paves way for greater production smoothing. VMI has been given a lot of recognition in the last couple of years. VMI has started gaining immense recognition in the last couple of years. Research work on it indicates that the kind of attention it has been getting off lately is primarily due to the strength of operation benefits derived from such a mutually symbiotic association. However, it was found that its implementation is primarily dependent on the sound business processes and interpersonal relationships. A completely technical approach would prove to be of little help if the people involved in this process are not kept into perspective. This approach is strongly dependent on efficient and effective team work. The collaboration and co-ordination by both manufacturers and retailers must be strong. Similarly the trust level between different supply chain partners is also very critical and important. The benefits for both must be clear cut or else the relationship will stand doomed. Finally, the goals of vendor inventory management should be in line with the goals of the organization. For instance, any sales bonuses are very often linked with short term goals and these goals are inconsistent with the goals of vendor managed inventory. Thus it is very important to establish concrete relationship, have the metrics and the right organizational structure in place to reap desired benefits from vendor managed inventory. More research can be conducted in future to discover the impact of team development on the success of vendor managed inventory. Similarly research on ways in which benefit sharing must be managed between different stake holders in the supply chain can also prove to be very helpful. References: Ury, W. (1993). Negotiating Your Way from Confrontation to Cooperation, revised second edition. Bantam. William Ury, R. F. (1991). 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