Taxonomy of Implementation Problems in VMI – Project Report on Vendor Managed Inventory Challenges

Category: Retail
Last Updated: 31 Mar 2023
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The goal of Vendor Managed Inventory is to provide a mutually beneficial relationship where both sides Customer and Vendor will be able to control the availability and flow of goods more smoothly and accurately. In VMI a manufacturer or distributor assumes the role of inventory planning for the customer. Extensive information sharing is required so that the manufacturer/distributor can maintain a high degree of visibility of its goods at the customer’s location. Instead of the customer reordering when its supply has been exhausted, the supplier is responsible for replenishing and stocking the customer at appropriate levels.

Wal-Mart has mastered VMI and is the company against which many other organizations benchmark themselves. This report covers various issues that are to be considered to implement the Vendor Managed Inventory. It is realized in the report that several risks are to be considered while executing VMI. The proper analysis is done in seeking the scenarios where one issue becomes a key factor in deciding to implement VMI or not. Both Marketers and Distributors have their own issues to challenge the implementation of VMI. Focus of the report is to determine taxonomy of implementation problems in VMI.

A means of optimizing Supply Chain performance in which the manufacturer is responsible for maintaining the distributor’s inventory levels. The manufacturer has access to the distributor’s inventory data and is responsible for generating purchase orders. We can see the differences in maintain inventory as:

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  • Under the typical business model: 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.
  • Vendor Managed Inventory model: The manufacturer receives electronic data (usually via EDI or the internet) that tells him the distributor’s sales and stock levels. The manufacturer can view every item that the distributor carriers as well as true point of sale data. The manufacturer is responsible for creating and maintaining the inventory plan. Under VMI, the manufacturer generates the order*, not the distributor. *Note: VMI does not change the "ownership" of inventory. It remains as it did prior to VMI.
  • Consignment Inventory: When the supplier places inventory at a customer’s location and retains ownership of the inventory. Payment is not made until the item is actually sold. A VMI relationship may or may not involve consignment inventory. Vendor Managed Inventory and Stakeholder’s Challenges Vendor Managed Inventory primarily have various stakeholder’s involved which includes Vendor/Manufacturer or distributor and retailer.

Suppliers would have to face higher administrative costs. They will have to allocate additional staff resources to properly manage the replenishment activities that were previously managed by the retailer. So to overcome these additional costs, vendors must have to save enough money from the inventory costs and sufficient sales volumes and gross margins.VMI would help in reducing the inventory which could lead to the less coverage of the shelf space on the retailer’s shop which might lead to the reduction in the market share for that product. To resolve this issue, vendor can provide more stock keeping units of the same product to fill the shelf space and to maintain the market share.

If VMI is implemented, then there is always a fear in the mind of the retailer that he would loose his control over the operations management. All the decisions like when to order, how much to keep as inventory and when to sell the product would be managed by the vendor now which can also have some impact on the profit margin of the retailer. Eg. In many cases, Vendor gives discounts to the retailer if they buy in bulk and hence above mentioned questions become crucial for the retailer from financial point of view. In case of products with high shelf life, he might want to order in bulk once, instead of ordering in small lots.

Retailer would be afraid that after implementing of VMI, when almost all the operations management related decisions are taken by the vendor, then the vendor might also think of forward integrating. Hence he would not be fully cooperative in sharing of the data and he would always try to make his presence felt in decision making to show the importance of his role.

The retailer would be afraid of losing other vendors, since in the FMCG business; retailers get products from a lot of vendors to maintain variety for the customers. It would be difficult to choose the vendor who will manage the inventory, because the same vendor would be biased towards his products. This would lead to the development of bad relationship between the retailer and the other vendors. After implementation of VMI, forecasting of demand is done by the manufacturer, not by the retailers or distributors and it might hit back, if manufacturer is not competent in judging the patterns of the consumer demand.

COne of the most important factors which can contribute to the success of the VMI is trust and good relationship between the vendor and the downstream retailer. But in the FMCG sector, where there are a lot of products in the same segment, most of the retailers are unwilling to share their data related to their sales with anyone, even with their supplier.

This leads to the ineffective communication between them and both have to incur huge inventory and management costs. Work ethics and cultural differences: Each company has its set of work ethics and work culture and if the difference is huge for a vendor and the retailer, then their decisions would not be aligned.

Technology is one of the most critical factors in facilitating the implementation of VMI which can also stand as a challenge in the implementation of VMI. A lot of technical systems would have to be installed for the effective working of the VMI.

Some of the technical solutions that can facilitate an effective VMI arrangement include:

  • Electronic data exchange (EDI). EDI transactions can enable suppliers to efficiently manage customer inventory levels remotely.
  • Replenishment software. These applications allow customers to accurately assess projected service levels (i. . the percentage of requests that can be filled from stock) based on various inventory investments.
  • Bar coding or radio frequency identification (RFID). These technologies “tag” products for tracking purposes and can dramatically improve the speed and integrity of the collection and reporting of consumption data.
  • Forecasting software. These applications gather and analyze information from sales, accounting, order entry, and other business systems, using sophisticated algorithms and predictive modeling techniques to generate fast, accurate demand forecasts.

A lot of investment would be required to install and maintain any of these systems. Properly equipped manpower would be required to operate these tools. Investment would also be required to integrate these tools with each other for efficient functioning of the VMI operations. All this cost would have to be incurred by the vendor and to compensate this cost, he must get returns from the efficient inventory management and higher sales volume due to less stock-outs. It requires a lot of time and money in testing the various VMI systems after installing them.

However, the average percentage of purchased materials and components (dollar volume) managed by on-site suppliers is only 13. 7%. So, it seems, there is a time and place for vendor-managed inventory. For example, if you've got an expensive manufacturing line and you ask one of your key suppliers to put in the systems and develop the expertise to supply the goods you need on a just-in-time basis, they will do that if they receive a significant portion of their revenues from you, says Steve Banker, service director of supply chain management at ARC Advisory Group, Dedham, Mass. However, you may have a lot of suppliers where you are only 1% of their total revenue - you are not their biggest priority," Banker says. "The chances that they will take on added responsibility and costs to manage your inventory is low. " So we can see that size of the business does matter in determining the feasibility of implementing VMI.

In addition, there is a certain amount of IT integration that has to go on in order to make the VMI relationship work. For suppliers, they need to be able to get your forecasts on a regular basis, make intelligence out of them and have visibility into your inventory levels on an ongoing basis," says Banker. "Turning that into useable intelligence is kind of difficult. Small and midsized companies often don't have the dedicated IT resources to make that happen, so they struggle.

Also companies like RUAG aren’t having any financial or strategic benefit out of implementing VMI and hence didn’t go for it. If we analyze the sector in which they operates we come to know, RUAG which is in Airlines sector involves comparatively simpler inventory to maintain while the risk involved in giving away the details was higher. On the other hand, with the scale of business P&G is in, it is beneficial for both manufacturer (vendor) as well as distributor (or Retailer) to implement VMI. It can be seen both scale and sector favors P&G.

Increase of accuracy in sales forecasts; Increase of sales by 47% for participating retailers; Improved management of a product mix, by reducing or discontinuing low-performance and low-turnover products;  Streamlined replenishment of high-performance products;

Excellent overall result with customers using the solution. VONPAR With Agentrics' VMI solution, acquired a full, web-based supply chain KPI tool. Vonpar Refrescos, Brazil's fourth largest Coca-Cola bottling company with products reaching 14 million consumers, implemented Agentrics' Vendor Managed Inventory (VMI) solution and with it acquired a complete web-based KPI tool. KPI's track internal and client stock levels, demand planning, order administration, as well as automation of Vonpar's product replenishment process, improving service and optimizing stock levels, while improving customer relationships.

Average sales increase of 26 percent in the first 12 months after the solution's implementation; Significant increase in sales of juices, tea and beer, which reflects improved stock planning for greater availability of products at store level; Maximized speed in the exchange of sales information at store level; Stock optimization allowing Vonpar to have the right product at the right time in the right place; Commercial team freed up to focus on avoiding out-of-stocks. SYNGENTA Implemented Agentrics' VMI solution to manage stock jointly with its suppliers.

Syngenta, a world-leading agri-business committed to sustainable agriculture through innovative research and technology, implemented Agentrics' Vendor Managed Inventory (VMI) solution to manage stock in conjunction with its suppliers  Reduction of communication errors through process automation and visibility to inventories. "Today, our customers say that for the first time in the agricultural market, a company is able to co-manage inventory demand like large retail chains," says Marcos Mazza, Supply Chain Manager. NeoGrid has a solution that perfectly suits our business model; Syngenta did not have to adapt to the tool, as the solution metall our needs. " Marcos Mazza, Supply Chain Manager.

The main purpose of this report is to highlight the taxonomy of implementation problems in VMI. From the cases visited, we can deduce that various factors play key roles in determining whether to go for Vendor Managed Inventory as there are lot of issues and cost involved in implementing the same.

Size of the business, Sector of the business in operation, inter-relationship among stakeholders all plays equally important role in the actual decision making. Though there is no clear cut understanding on whether to implement VMI or not but one can easily concur with increasing role of technology and with dynamic demand it is only going to rise.


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  3. Collaborative Planning, Forecasting, and Replenishment Committee. (1998) Jointly Managed Inventory Approach Provides a Lower Level of Detail. CPFR. Org http://www. scm. ethz. ch/publications/Practitioner_publications/Niranjan_etal_2011_Are_you_ready_for_VMI. pdf
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Taxonomy of Implementation Problems in VMI – Project Report on Vendor Managed Inventory Challenges. (2018, Jul 15). Retrieved from

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