Vendor Managed Inventory

Vendor Managed Inventory

Vendor Managed Inventory is a means of optimizing supply chain performance, in which the manufacturer is responsible for maintaining the distributors inventory levels. The manufacturer has access to the distributors inventory data and is responsible for generating purchase orders. During this process, the supplier is guided by specified objectives regarding inventory levels, fill rates, and transaction costs.

A typical business model without VMI entails that when a distributor needs product, they place an order against a manufacturer. The distributor is in total control of the timing and size of the order being placed. The distributor maintains the inventory plan.

However, when utilizing the Vendor Managed Inventory model, the manufacturer receives electronic data, usually EDI(Electronic Data Interchange) or via the internet, that tells him the distributors sales and stock levels. The manufacturer can then view every item that the distributor carriers as well as true point of sale data. The manufacturer becomes responsible for creating and maintaining the inventory plan. Under VMI, the manufacturer generates the order, not the distributor. Note that VMI does not change the "ownership" of inventory. It remains as it did prior to VMI.

VMI consists of two EDI transactions that are the basis of the process:

* Product Activity Record; the data contained in this document are sales and inventory information. This is the primary transaction

* The second transaction contains and deals with the product numbers and the quantities ordered by the supplier as the customer requests

In all of its forms VMI should be about improving visibility of demand and product flow in a supply chain, facilitating a more timely and accurate replenishment process between a supplier (vendor) and an inventory site (customer, distributor, distribution center, etc...). The application of VMI can be at any point within a supply chain:

Manufacturer - Wholesale Distributor

Wholesale Distributor - Retail

Manufacturer - End Customer

Wholesale Distributor - End Customer

Manufacturer - Internal Inventory Sites

Inventory is the proxy for information. In the absence of timely and accurate consumption data, each node in the supply chain compensates for the lack of information with inventory. Not only does poor information flow build supply chain inventories, but it also restricts each company's ability to react to increases in demand, causes extended outages, service interruptions and lost sales. As actual demand for products is disseminated up the supply chain in a more real time environment, the more closely aligned production is with demand. As the gap between production and demand diminishes, so to does supply chain inventories and service level interruptions.

The ultimate goal is supply chain excellence, as defined by service, speed and cost. Delivering the best service at the point of consumption in the least amount of time at the lowest total cost. The result is a supply chain that has an