VMI: A Thing of the Past or Still Relevant?

For several decades, OEMs have pushed their suppliers to set up vendor managed inventory (VMI) programs. It was a way to get inventory-holding costs off the OEM accounting books while ensuring continuously replenished supply delivered just-in-time when the manufacturing lines needed them. Suppliers often initially gawked at the OEM requirements of putting VMI hubs close to customer manufacturing sites, but in the end, it gave them some predictable control over when, where, and how much of their products were shipped and how they managed inventory levels in the channel.

In the age of a new wave of cloud-based logistics and inventory tracking, where companies have greater visibility into demand and supply fluctuations, does VMI still work and deliver results? Supply Chain Insights thinks so.

The firm's latest research, What Is the Value of Your Vendor Managed Inventory Relationships?, found that VMI orders ship nearly a day earlier to the retailer than non-VMI orders. Also worth noting, the average time without VMI is 4.5 days, higher than the time with a VMI process, which averages about 3.7 days.

Although the firm's study is based on a survey of 38 respondents from the consumer packaged goods or food and beverage industries, there are some points that can be extrapolated and applied in the electronics and high-tech sectors. Like, for instance, the primary question the report raises: Does an old process need a facelift?

As Supply Chain Insights notes, today's existing VMI initiatives have become legacy practices in their own right. Many VMI programs took shape as far back as the 1980s. Since then, companies have taken these suppliers relationships for granted, and current supply chain professionals who have inherited the management of these programs have kept them relatively status quo.

Although the overall process hasn't changed much over the decades, the business world has changed and the strategic nature of VMI relationships warrants review, the firm points out. Faced with slow growth and complex, global supply chain operations, Supply Chain Insights suggests that companies re-evaluate their VMI programs with two key questions in mind: Are we maximizing value? Should we re-think the processes to drive even greater value?

On one front, the main business drivers that shaped VMI programs are still valid today. The principal benefits come in the form of lower transportation costs, better order quality, reduction in lead time, improved customer service, stronger partner relationships, and early warning alerts of potential out-of-stock products, the company found.

But, by filtering the VMI re-think through a maximizing value equation, companies could expect much more from their existing practices.

For example, companies can use the significant amount of channel inventory data they have collected to redefine and reprioritize their supply chain processes and improve how they sync their VMI flows with their supply chain systems.

Also, the data could better be leveraged for demand planning and demand management process improvement. Although demand visibility was a widely promised benefit when VMI programs were set up, few companies have aggressively monitored VMI relationships as part of their demand visibility strategy. Supply Chain Insights found that many companies use the VMI signal as an input to the order-processing stream, but haven't expanded the activity to be a demand-sensing tool, something that could carve out a stronger competitive position if used appropriately.

What do VMI programs look like today in your company? What other ways can you bank on them?

4 comments on “VMI: A Thing of the Past or Still Relevant?

  1. Anand
    August 12, 2014

    Although VMI gives the company a better field of vision, it doesn't predict whether a market is self sustaining. The market can crash anytime and VMI doesn't help the managers seeing that. If we take this factor into the equation, then when a market hits a low, then all the other factors (like low cost transportation etc) will weigh down the operational ability of the company because of the VMI.

  2. kilamna
    August 12, 2014

    Inventory is an indicator of poor management. Granted management doesnt 'control' demand, but they certainly claim credit when things go well, and look the 'other way' when things dont go well.  The ONLY way to improve management is to KNOW where the problems lie; if management just palms off the responsibility to vendors [VMI] then they have less incentive to take control of their business.  It does keep inventory off the books, and the finances 'look better', BUT at the cost of the overall business not being well run.  No matter who has the inventory on their books, there IS a cost associated with it, and that cost is passed on to someone in the chain.  

    I say: keep the VMI 'systems' in place, BUT shift the inventory on to the OEM's books. Then watch them improve their forecast systems, customer relationships, and squirm a lot along the way.  The difference between the old BIS is that it was 'backwards looking' and transactional; we need to be looking at interaction data, and be able to make better decisions.

    STORY:  Some years ago our sales team was bugging us to pul-in delivery commitments for a major electronics products OEM. I felt the pressure as this was indeed my largest customer. I did basic field foot research: visited a few local big-box electronics outlets, and saw 'walls' of that product boxes stacked floor-to-ceiling along 50-100 ft of the walls. Contacted the sales teamm to check with the OEM. RESPONSE: The product is not selling as fast as we thought; Please push out deliveries by 3-4 months.  


    August 12, 2014

    It is hard to argue against VMI as surely VMI implemented efficiently must be a good thing for all involved.  I suppose the old ways of doing VMI must surely evolve as everything does but I doubt the need for VMI will go away.

  4. Daniel
    August 13, 2014

    “In the age of a new wave of cloud-based logistics and inventory tracking, where companies have greater visibility into demand and supply fluctuations, does VMI still work and deliver results? Supply Chain Insights thinks so.”

    Jenniffer, cloud based apps and database can push the demand vs supply in real time with certain clicks. One way it's good to analyze the real time market trend and to cater the short demands.

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