Throughout
the supply chain, vendor-managed inventory (VMI) is a way to cut
costs and keep inventory levels low. Its practitioners range from
food manufacturers like Kraft Inc. in New York and Mott's USA in
Stamford, Conn., to chain-store wizard Wal-Mart Stores Inc. in
Bentonville, Ark.
VMI lets companies reduce overhead by shifting responsibility for
managing and replenishing inventory to vendors.
"If you're smart enough to transfer the ownership of inventory to
your vendors, your raw materials and work-in-process inventory comes
off your balance sheets. Your assets go down, and you need less
working capital to run your business," says Ron Barris, global
leader of supply-chain management for the high-tech industry at
Ernst & Young LLP.
In VMI, the vendor tracks the numbers of products shipped to
distributors and retail outlets. Tracking tells the vendor whether
or not the distributor needs more supplies. Products are
automatically replenished when supplies run low, and goods aren't
sent unless they're needed, consequently lowering inventory at the
distribution center or retail store. Suppliers and buyers use
written contracts to determine payment terms, frequency of
replenishment and other terms of the agreement.
VMI is enabled by information technology, which often allows for
a direct project payoff. The most prevalent technology in VMI is
electronic data interchange (EDI), an ordering system traditionally
conducted over private value-added networks. Typically, the
manufacturer takes a daily review of inventory by pulling down EDI
files from the distributor. The manufacturer then uses the inventory
data to put together an anticipated order for the distributor. After
getting an electronic acknowledgment, the manufacturer ships the
order. When the product has been received, payment is made with an
electronic funds transfer from the distributor's bank.
Distributors of hard goods such as auto parts and electrical
supplies began experiencing the benefits of EDI-based VMI several
years ago, says Scott Stratman, president of The Distribution Team,
a consulting company in Colorado Springs. Stratman estimates that by
lowering inventory levels and eliminating paperwork such as purchase
orders and payment by check, such distributors have cut the time for
order fulfillment from a range of 22 to 29 days to one of 14 to 17
days.
Many VMI implementations use customizable software from providers
like Supply Chain Solutions in Enfield, Conn., E3 Corp. in Marietta,
Ga., and Manugistics Inc. in Rockville, Md. VMI is also being
integrated into larger supply-chain implementations that combine the
inventory management, order fulfillment and product replenishment of
VMI with collaborative sales planning and forecasting.
For the most part, manufacturers haven't integrated VMI with
their internal enterprise resource planning (ERP) systems. That's
mainly because software vendors haven't built interfaces between the
two types of systems.
"The two systems use different data models," says Ron Girard, an
analyst at Boston-based Advanced Manufacturing Research. Generally,
ERP components haven't scaled to the item location volume demanded
in a manufacturer-to-retailer environment. So unless you're willing
to take on the burden of systems integration, you are faced with a
sneaker net, Girard says. Item location volumes are computed by
multiplying the number of units of an item by the numbers of
locations where it's sold.
Though automated today, VMI was once strictly manual. For several
decades, route salesmen for food manufacturers have taken inventory
when they visit stores to stock the grocery shelves, says Tim Van
Mieghem, president of The Proaction Group, a consultancy in Chicago.
Makers of hospital supplies became similarly inspired, employing
in-hospital attendants to count and replenish items.
Department stores like Wal-Mart moved to automated VMI in the
late 1980s. One of the driving factors was the difficult task of
predicting how much seasonal apparel was needed, says Bob Copeland,
senior manager at Atlanta-based Kurt Salmon Associates, a consulting
firm in the retail arena.
The apparel industry has continued to be a pioneer in VMI ever
since. For example, Greensboro, N.C.-based VF Corp., maker of brands
like Lee and Jantzen, has been implementing a sophisticated system
that integrates retail inventory data from VMI into floor-space
management at the store level. In a beta test, ShopKo Stores Inc. in
Green Bay, Wis., reportedly experienced a gain of more than 20% in
sales of men's jeans.
Ironically, though, industries facing complex situations have
been among the last to adopt automated VMI. Supermarkets have
typically taken longer than department stores, for example. The
sheer numbers of items in consumers' grocery store carts have meant
greater complexity in tracking and using sales data.
VMI automation at its peak can be seen in industries like car and
paper manufacturing, which need to comply with environmental
guidelines for water treatment. Manufacturers in those industries
are using VMI systems to track the need to replenish water and
chemicals. They do this by embedding sensors in the water treatment
tanks and using satellites to monitor the tanks.
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