July 2004 | How-To | Ten Tips

Running an Effective VMI Program

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One way to reduce capital outlay within the supply chain is through deferred ownership of inventory—letting vendors manage the inventory of their products in your distribution center. With a Vendor Managed Inventory (VMI) program, vendors receive stock information from their customers, then calculate what product they should ship to maintain adequate inventory levels at the customer's facility.

Careful planning and selecting a good provider can ensure an effective VMI program. Bob Fatovic, Ryder's senior vice president of supply chain operations for electronics, high-tech, telecommunications and consumer product goods, provides the following 10 tips for running a successful VMI program.

1. Set clear goals. Make sure you and your hub provider have a clear understanding of your goals in developing a VMI program.

2. Consider processes and pricing. Select a provider who has good processes and pricing that is designed around a set of criteria you establish, and that is customized to your product-specific requirements.

3. Integrate technology with physical services. Work with a partner who places a heavy emphasis on integrating the information technology portion of the process with day-to-day physical services. You want to achieve a balance between cost competitiveness and robust services.

4. Understand the market demand for your products. Utilizing information about market demand, your VMI partner should direct the flow and change legal title to your product to the point it is pulled into your owned inventory.

5. Forge three-way partnerships. Cooperation between your company, your supplier, and your third-party logistics provider is critical. Your suppliers should be your partners in fostering your manufacturing success. They should only sell as you consume.

6. Plan. It is crucial that you have visibility to in-transit products and parts for supplying the hub with a full view of all material available. This provides the intellectual ownership of the product in the pipeline that is critical for success in your planning process.

7. Collaborate. The most successful Vendor Managed Inventory programs are based on collaboration among all partners in the supply chain. You need to strive toward a common goal—the mission of shrinking both the length and volume of the supply pipeline so everyone benefits from the VMI program.

8. Make sure suppliers are web-savvy. Ensure your suppliers utilize web-based tools to monitor product consumption on a real-time basis.

9. React. You should have value-add, real-time custom reports that highlight exceptions, such as your stock levels.

10. Build in measurement and improvement abilities. Make sure the VMI program is measurable—it should foster continuous improvement processes and cost reduction opportunities.

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