Vendor-managed inventory

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Vendor-managed inventory (VMI) is an inventory management practice in which a supplier of goods, usually the manufacturer, is responsible for optimizing the inventory held by a distributor.

Contents

Under VMI, the retailer shares their inventory data with a vendor (sometimes called supplier) such that the vendor is the decision-maker who determines the order size, whereas in traditional inventory management, the retailer (sometimes called distributor or buyer) makes his or her own decisions regarding the order size. Thus, the vendor is responsible for the retailer's ordering cost, while the retailer usually acquires ownership of the stock and has to pay for their own holding cost. One supply chain management glossary identifies VMI as

The practice of retailers making suppliers responsible for determining order size and timing, usually based on receipt of retail POS and inventory data. [1]

although a 2008 article notes that there is no standard definition of VMI and the term's usage varies "significantly" among companies supporting VMI processes. [2]

A third-party logistics provider may also be involved to help ensure that the buyer has the required level of inventory by adjusting the demand and supply gaps. [3]

Overview

One of the keys to making VMI work is shared risk. In some cases, if the inventory does not sell, the vendor (supplier) will repurchase the product from the buyer (retailer). In other cases, the product may be in the possession of the retailer but is not owned by the retailer until the sale takes place, meaning that the retailer simply houses (and assists with the sale of) the product in exchange for a predetermined commission or profit (sometimes referred to as consignment stock). A special form of this commission business is scan-based trading, where VMI is usually applied but its use is not mandatory. [4]

This is one of the successful business models used by Walmart, Procter & Gamble [5] and many other big box retailers. [6] Oil companies often use technology to manage the gasoline inventories at the service stations that they supply (see Petrolsoft Corporation). Home Depot uses the technique with larger suppliers of manufactured goods. VMI helps foster a closer understanding between the supplier and manufacturer by using electronic data interchange formats, EDI software and statistical methodologies to forecast and maintain correct inventory in the supply chain.

Vendors benefit from more control of displays and more customer contact for their employees; retailers benefit from reduced risk, better store staff knowledge (which builds brand loyalty for both the vendor and the retailer), and reduced display maintenance outlays.

Usage of VMI can prevent stocking undesired inventories and hence can lead to an overall cost reduction. Moreover, the magnitude of the bullwhip effect is also reduced by employing the VMI approach in a buyer-supplier cooperation. [7]

Consumers benefit from knowledgeable store staff who are in frequent and familiar contact with manufacturer (vendor) representatives when parts or service are required. Store staff have good knowledge of most product lines offered by the entire range of vendors. They can help the consumer choose from competing products for items most suited to them and offer service support being offered by the store.

At the goods manufacturing level, VMI helps prevent overflowing warehouses or shortages, as well as costly labor, purchasing and accounting. With VMI, businesses maintain a proper inventory, and optimized inventory leads to easy access and fast processing with reduced labor costs. [8]

Variant models include "consigned VMI", where the supplier or manufacturer retains ownership, and "dynamic VMI", where the buffer inventory remains located with the supplier, which can be beneficial if the supplier and retailer are located close enough together, and allows for buffer stock to be shared among distributors. [2]

As a symbiotic business relationship, VMI makes it less likely that a business will unintentionally run out of stock of a good and reduces inventory in the supply chain. Furthermore, vendor (supplier) representatives in a store benefit the vendor by ensuring the product is properly displayed and store staff are familiar with the features of the product line, all these while helping to clean and organize their product lines for the store. However, high-tech sector research undertaken in 2003 concluded that under VMI, "sizeable inventory burdens [are transferred] from the customer to the supplier" and that "significant additional operating expenses for the supplier" therefore arise. [9]

Components

1. Inventory location

In VMI practice, inventory location depends on the arrangement between the vendor and the customer. The first option is for the inventory to be located both at the customer's and the supplier's premises. For the supplier, this serves as a safeguard against short delivery cycles or unsynchronized production cycles. [10] On the other hand, this arrangement can also lead to higher inventory holding costs because of the need for storage of the material, its tracking and handling, and the threat of inventory obsolescence. [11]

Another option can be for the vendor to deliver to the customer's central warehouse or alternatively, to a third party's warehouse. The latter can be a solution for buyers that have outsourced part or all of their logistics operations. Managing the inventory at the central warehouse enables better optimization of deliveries, lower costs and ultimately enables the buyer to maximize economies of scale. [11] However, it is not always an option, so third-party warehouses are often the solution to many different problems such as the supplier's warehouse being too far away from the buyer's or the buyer's inexperience in storing particular types of goods that are harder to store. [10]

The inventory can also be located directly at the buyer's premises such as the buyer's on-site warehouse, production line or the shop floor itself. [11] However, replenishing inventory levels at these specific locations can be more costly, less organized and overall more difficult to manage for the supplier. [10]

2. Inventory Ownership

Inventory ownership refers to the ownership of the inventory and when the invoice is being issued to the retailer. In vendor managed inventory, there is a number of solutions in terms of payment and transfer of ownership. [11]

In the first alternative, the vendor is the owner of inventory at the premises of the customer. Invoice is issued when the items are issued from the stock. In the second alternative, the retailer assumes ownership of the inventory, but receives an invoice upon delivery. However, the vendor is not paid until the customer issues the items from stock and within a delay according to agreed terms of payment. [11] This enables risk-sharing between both parties, as the retailer carries risk of obsolescence while the vendor would have been accountable for capital costs and fluctuation in prices of the inventory. [10]

In the third alternative, also referred to as a standard process in traditional order delivery, the retailer owns the inventory upon delivery, while the vendor invoices the retailer once the shipment has been made. [11] In this setting, retailer is responsible for inventory investment and holding costs, but has an option of protecting themselves against price fluctuations. [10]

3. Level of Demand Visibility

These elements refer to the type of demand information shared by customers to assist the suppliers in controlling their inventory. Many types of demand information are shared in the VMI Program. The demand information that are visible to the supplier are: sales data, stock withdrawal, production schedule, inventory level, goods in transit, back order, incoming order and return. It is argued that sharing data and inventory can improve the supplier’s production planning, make it more stable and increase its visibility. It also provides a better understanding of the seasonal changes, and helps to figure out critical times. The supplier can therefore take advantage of this information and adapt its production to the customers’ requests, and respond faster. With the increasing visibility of information, the supplier has a longer timeframe for replenishment arrangement. [12] The supplier also gets real time visibility, which allows him to have a hand on the inventory for the buyer demand forecast, which allows for projecting inventory based on future demand to target his inventory (minimize or maximize it). [13] This stability and coordination allows to reduce the bullwhip effect, [14] as the manufacturer has a clearer visibility on the supply chain and an overview of the incoming demand. [15] On the retailer’s side, all the costs associated with inventory management, (holding costs, shortage costs, spoilage costs, etc.) are greatly reduced. E.g., the retailer will rarely face stock shortage and holding costs are kept at a minimum since just enough inventory is held. [16]

Data is usually updated every week and is transmitted through an EDI, which allows forecasting actual market trends. The data is based on real quantities of produced and sold items. This agreement to share information is aimed at maintaining a steady flow of necessary goods.

Classes of mathematical model

1. Bi-Level VMI Mathematical Models

The first class of VMI, bi-level VMI mathematical model, includes two levels (or echelons) in a supply chain: vendor and retailer. There are three types of VMI mathematical models developed from this class, which are single-vendor single-retailer VMI model, [17] single-vendor multi-retailer VMI model, [18] and multi-vendor multi-retailer VMI model. [19] This class has been significantly developing. For example, single-vendor single-retailer VMI model was extended for multi-product case, [20] the consignment stock (CS), [21] and discount. [7]

2. Multi-Level VMI Mathematical Models

The second class is a multi-level VMI mathematical model such as a single manufacturer-single vendor multi-retailer (SM-SV-MR) VMI model. [22] Those studies [which] fail to model replenishment frequencies cannot be classified here.[ clarification needed ]

Replenishment frequencies play an important role in integrated inventory models to reduce the total supply chain cost, but it has been noted that many studies fail to model it in mathematical problems. [22]

See also

Related Research Articles

<span class="mw-page-title-main">Supply chain management</span> Management of the flow of goods and services

In commerce, supply chain management (SCM) deals with a system of procurement, operations management, logistics and marketing channels, through which raw materials can be developed into finished products and delivered to their end customers. A more narrow definition of supply chain management is the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronising supply with demand and measuring performance globally". This can include the movement and storage of raw materials, work-in-process inventory, finished goods, and end to end order fulfilment from the point of origin to the point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain.

<span class="mw-page-title-main">Logistics</span> Management of the flow of resources

Logistics is a part of supply chain management that deals with the efficient forward and reverse flow of goods, services, and related information from the point of origin to the point of consumption according to the needs of customers. Logistics management is a component that holds the supply chain together. The resources managed in logistics may include tangible goods such as materials, equipment, and supplies, as well as food and other consumable items.

<span class="mw-page-title-main">Inventory</span> Goods held for resale

Inventory or stock refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation.

<span class="mw-page-title-main">Supply chain</span> System involved in supplying a product or service to a consumer

A supply chain, sometimes expressed as a "supply-chain", is a complex logistics system that consists of facilities that convert raw materials into finished products and distribute them to end consumers or end customers. Meanwhile, supply chain management deals with the flow of goods within the supply chain in the most efficient manner.

Cross-docking is a logistical practice of Just-In-Time Scheduling where materials are delivered directly from a manufacturer or a mode of transportation to a customer or another mode of transportation. Cross-docking often aims to minimise overheads related to storing goods between shipments or while awaiting a customer's order. This may be done to change the type of conveyance, to sort material intended for different destinations, or to combine material from different origins into transport vehicles with the same or similar destinations.

The beer distribution game is an educational game that is used to experience typical coordination problems of a supply chain process. It reflects a role-play simulation where several participants play with each other. The game represents a supply chain with a non-coordinated process where problems arise due to lack of information sharing. This game outlines the importance of information sharing, supply chain management and collaboration throughout a supply chain process. Due to lack of information, suppliers, manufacturers, sales people and customers often have an incomplete understanding of what the real demand of an order is. The most interesting part of the game is that each group has no control over another part of the supply chain. Therefore, each group has only significant control over their own part of the supply chain. Each group can highly influence the entire supply chain by ordering too much or too little which can lead to a bullwhip effect. Therefore, the order taking of a group also highly depends on decisions of the other groups.

Inventory control or stock control can be broadly defined as "the activity of checking a shop's stock". It is the process of ensuring that the right amount of supply is available within a business. However, a more focused definition takes into account the more science-based, methodical practice of not only verifying a business's inventory but also maximising the amount of profit from the least amount of inventory investment without affecting customer satisfaction. Other facets of inventory control include forecasting future demand, supply chain management, production control, financial flexibility, purchasing data, loss prevention and turnover, and customer satisfaction.

Consignment is a process whereby a person gives permission to another party to take care of their property and retains full ownership of the property until the item is sold to the final buyer. It is generally done during auctions, shipping, goods transfer, or putting something up for sale in a consignment store. The owner of the goods pays the third-party a portion of the sale for facilitating the sale. Consignors maintain the rights to their property until the item is sold or abandoned. Many consignment shops and online consignment platforms have a set day limit before an item expires for sale. Within the time of contract, reductions of the price are common to promote the sale of the item, but vary on the type of item sold (usually 60–90 days).

Scan-based trading (SBT) is the process where suppliers maintain ownership of inventory within retailers' warehouses or stores until items are scanned at the point of sale. Suppliers, such as manufacturers or farmers, own the product until it is purchased by the customer, with the store or venue then buying the product from the supplier and reselling it to the customer. Analysts in the grocery sector estimate scan-based trading accounted for $21 billion dollars in consumer goods purchased in the grocery industry alone in 2020, or nearly 3% of overall sales.

<span class="mw-page-title-main">Bullwhip effect</span> Form of distribution marketing

The bullwhip effect is a supply chain phenomenon where orders to suppliers tend to have a larger variability than sales to buyers, which results in an amplified demand variability upstream. In part, this results in increasing swings in inventory in response to shifts in consumer demand as one moves further up the supply chain. The concept first appeared in Jay Forrester's Industrial Dynamics (1961) and thus it is also known as the Forrester effect. It has been described as "the observed propensity for material orders to be more variable than demand signals and for this variability to increase the further upstream a company is in a supply chain". Research at Stanford University helped incorporate the concept into supply chain vernacular using a story about Volvo. Suffering a glut in green cars, sales and marketing developed a program to sell the excess inventory. While successful in generating the desired market pull, manufacturing did not know about the promotional plans. Instead, they read the increase in sales as an indication of growing demand for green cars and ramped up production.

Supply-chain optimization (SCO) aims to ensure the optimal operation of a manufacturing and distribution supply chain. This includes the optimal placement of inventory within the supply chain, minimizing operating costs including manufacturing costs, transportation costs, and distribution costs. Optimization often involves the application of mathematical modelling techniques using computer software. It is often considered to be part of supply chain engineering, although the latter is mainly focused on mathematical modelling approaches, whereas supply chain optimization can also be undertaken using qualitative, management based approaches.

Field inventory management, commonly known as inventory management is the function of understanding the stock mix of a company and the different demands on that stock. The demands are influenced by both external and internal factors and are balanced by the creation of purchase order requests to keep supplies at a reasonable or prescribed level. Inventory management is important for every other business enterprise.

<span class="mw-page-title-main">Vendor</span> Supplier of goods or services

In a supply chain, a vendor, supplier, provider or a seller, is an enterprise that contributes goods or services. Generally, a supply chain vendor manufactures inventory/stock items and sells them to the next link in the chain. Today, these terms refer to a supplier of any goods or service.

In marketing, carrying cost, carrying cost of inventory or holding cost refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost, and inventory costs related to perishability, shrinkage (leakage) and insurance. Carrying cost also includes the opportunity cost of reduced responsiveness to customers' changing requirements, slowed introduction of improved items, and the inventory's value and direct expenses, since that money could be used for other purposes. When there are no transaction costs for shipment, carrying costs are minimized when no excess inventory is held at all, as in a just-in-time production system.

Customer demand planning (CDP) is a business-planning process that enables sales teams to develop demand forecasts as input to service-planning processes, production, inventory planning and revenue planning.

Channel coordination aims at improving supply chain performance by aligning the plans and the objectives of individual enterprises. It usually focuses on inventory management and ordering decisions in distributed inter-company settings. Channel coordination models may involve multi-echelon inventory theory, multiple decision makers, asymmetric information, as well as recent paradigms of manufacturing, such as mass customization, short product life-cycles, outsourcing and delayed differentiation. The theoretical foundations of the coordination are based chiefly on the contract theory. The problem of channel coordination was first modeled and analyzed by Anantasubramania Kumar in 1992.

Merge-in-transit (MIT) is a distribution method in which several shipments from suppliers originating at different locations are consolidated into one final customer delivery. This removes the need for distribution warehouses in the supply chain, allowing customers to receive complete deliveries for their orders. Under a merge-in-transit system, merge points replace distribution warehouse. In today's global market, merge-in-transit is progressively being used in telecommunications and electronic industries. These industries are usually dynamic and flexible, in which products have been developed and changed rapidly.

Inventory management software is a software system for tracking inventory levels, orders, sales and deliveries. It can also be used in the manufacturing industry to create a work order, bill of materials and other production-related documents. Companies use inventory management software to avoid product overstock and outages. It is a tool for organizing inventory data that before was generally stored in hard-copy form or in spreadsheets.

<span class="mw-page-title-main">Supply chain finance</span>

Supply chain financing is a form of financial transaction wherein a third party facilitates an exchange by financing the supplier on the customer's behalf. The term also refers to the techniques and practices used by banks and other financial institutions to manage the capital invested into the supply chain and reduce risk for the parties involved.

Inventory optimization is a method of balancing capital investment constraints or objectives and service-level goals over a large assortment of stock-keeping units (SKUs) while taking demand and supply volatility into account.

References

  1. ↑ Council of Supply Chain Management Professionals, Supply Chain Management Terms and Glossary, updated Fall 2008, accessed 13 March 2023
  2. 1 2 Chhabra, N., Collaborative Fulfillment, APICS e-News, published 24 September 2008, accessed 13 March 2023
  3. ↑ What Is Vendor Managed Inventory? Archived 2016-09-01 at the Wayback Machine , Datalliance, Retrieved Aug. 16, 2016
  4. ↑ Vendor Managed Inventory: Three Steps in Making it Work, NC State University Supply Chain Resource Cooperative, Retrieved Aug. 16, 2016
  5. ↑ Clear Spider, The Benefits of Vendor Managed Inventory (VMI), published 26 May 2015, accessed 10 October 2022
  6. ↑ Sila Çetinkaya & Chung-Yee Lee, "Stock Replenishment and Shipment Scheduling for Vendor-Managed Inventory Systems ", Management Science, Volume 46 Issue 2, February 2000, pp. 217-232. Accessed 9 June 2014
  7. 1 2 Sadeghi, Javad; Mousavi, Seyed Mohsen; Niaki, Seyed Taghi Akhavan (2016-08-01). "Optimizing an inventory model with fuzzy demand, backordering, and discount using a hybrid imperialist competitive algorithm". Applied Mathematical Modelling. 40 (15–16): 7318–7335. doi: 10.1016/j.apm.2016.03.013 . ISSN   0307-904X.
  8. ↑ "Insider's Tips to Packaging Issues", CGR Products, Retrieved Aug. 16, 2016
  9. ↑ McBeath, B., The Truth about VMI: Revelations and Recommendations from the 2003 ESCA-ChainLink Research Study on VMI in the High Tech Supply Chain, Chainlink Research, published May 2003, accessed 2 May 2022
  10. 1 2 3 4 5 Radzuan, Kamaruddin; Abdul Rahim, Mohd kamarul Irwan; Moohd Nawi, Mohd Nasrun; Mazri, Yaakob (January 2018). "Vendor managed inventory practices: A case in manufacturing companies". International Journal of Supply Chain Management. 7 (4): 196–201.
  11. 1 2 3 4 5 6 Elvander, Mikael; Sarpola, Sami; Mattsson, Stig-Arne (November 2007). "Framework for characterizing the design of VMI systems". International Journal of Physical Distribution & Logistics Management. 37 (10): 782–798. doi:10.1108/09600030710848914.
  12. ↑ Elvander, Mikael; Sarpola, Sami; Mattsson, Stig-Arne (November 2007). "Framework for characterizing the design of VMI systems". 37 (10): 782–798. doi : 10.1108/09600030710848914.
  13. ↑ E2open (2016), Building an Effective Vendor-Managed Inventory Program
  14. ↑ Guillaume Marquès, Jacques Lamothe, Caroline Thierry, Didier Gourc. Vendor Managed inventory, from concept to processes, for an unified view. ILS 2008 - 2nd International Conference on Information Systems, Logistics, and Supply Chain, May 2008, Bordeaux, United States. p.536-546. hal-00444174
  15. ↑ Xihang (Eastman) Kou, Vendor-Managed Inventory Forecast Optimization and Integration, MIT thesis summary, 2008
  16. ↑ "Cost Reduction Strategy through Supplier-Managed Inventory | SIPMM Publications". publication.sipmm.edu.sg. 2019-01-12. Retrieved 2022-07-07.
  17. ↑ Yao, Yuliang; Evers, Philip T.; Dresner, Martin E. (2007). "Supply chain integration in vendor-managed inventory". Decision Support Systems. 43 (2): 663–674. doi:10.1016/j.dss.2005.05.021. S2CID   5637162 . Retrieved 2018-10-15.
  18. ↑ Sadeghi, Javad; Sadeghi, Saeid; Niaki, Seyed Taghi Akhavan (2014-07-10). "Optimizing a hybrid vendor-managed inventory and transportation problem with fuzzy demand: An improved particle swarm optimization algorithm". Information Sciences. 272: 126–144. doi:10.1016/j.ins.2014.02.075. ISSN   0020-0255.
  19. ↑ Sadeghi, Javad; Mousavi, Seyed Mohsen; Niaki, Seyed Taghi Akhavan; Sadeghi, Saeid (2013-09-01). "Optimizing a multi-vendor multi-retailer vendor managed inventory problem: Two tuned meta-heuristic algorithms". Knowledge-Based Systems. 50: 159–170. doi:10.1016/j.knosys.2013.06.006. ISSN   0950-7051.
  20. ↑ javad, sadeghi; ahmad, sadeghi; mohammad, Saidi mehrabad (2011-09-29). "A parameter-tuned genetic algorithm for vendor managed inventory model for a case single-vendor single-retailer with multi-product and multi-constraint". Journal of Optimization in Industrial Engineering (9): 57–67. ISSN   2251-9904.
  21. ↑ Zavanella, Lucio; Zanoni, Simone (2009-03-01). "A one-vendor multi-buyer integrated production-inventory model: The 'Consignment Stock' case". International Journal of Production Economics. 118 (1): 225–232. doi:10.1016/j.ijpe.2008.08.044. ISSN   0925-5273.
  22. 1 2 Sadeghi, Javad; Mousavi, Seyed Mohsen; Niaki, Seyed Taghi Akhavan; Sadeghi, Saeid (2014-10-01). "Optimizing a bi-objective inventory model of a three-echelon supply chain using a tuned hybrid bat algorithm". Transportation Research Part E: Logistics and Transportation Review. 70: 274–292. doi:10.1016/j.tre.2014.07.007. ISSN   1366-5545.

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