VMI 2.0: A Whole New Game
Vendor Managed Inventory is shaking off its old-school image and regaining popularity thanks to improved technology, robust communication, tighter demand signal linkage, and a new openness to collaboration that has turbo-charged enterprise benefits.
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It was cutting edge—in the 1980s. Vendor Managed Inventory (VMI) has quietly chugged along for years, appreciated yet unheralded in industries including automotive, consumer goods/retail, and pharmaceuticals. But today, VMI is shaking off its antiquated image and regaining the spotlight in markets such as healthcare and retail.
VMI advocates are making this once-separate process more central and mainstream. For consumer products behemoths and their largest customers, for example, it's not so much vendor-managed inventory as it is a fully collaborative approach to managing inventory across the majority of product lines and channels, closely aligned to retailer forecasts and planned promotions. For others, such as industrial distributors, VMI is a well-oiled replenishment machine used by customers to keep both production and maintenance, repair, and overhaul (MRO) materials flowing.
But not all VMI programs succeed at that level. The process requires senior management endorsement, a collaborative mindset among supply chain partners, the right data sharing technology, and a certain level of trust. Without these elements in place, VMI initiatives often fail to deliver on their promise and ultimately collapse.
VMI Then and Now
The original VMI concept was simple—let the vendor manage the fulfillment of high-volume material at an agreed-upon inventory level. VMI was seen as a way to reduce inventories, cut costs, improve supply chain efficiencies, and reduce administrative tasks around creating and managing orders.
Over time, and depending on industry, VMI took on different names and models: vendor managed replenishment, supplier managed inventory, direct store delivery, direct plant delivery, and field inventory management. In retail, the concept was incorporated into collaborative planning, forecasting, and replenishment (CPFR).
Some practitioners apply VMI processes to their suppliers as well as their customers. "It's the same business process—sharing forecast demand with suppliers to allow them to more tightly synch product and distribution plans," says Karin Bursa, vice president of marketing at Atlanta-based Logility, a provider of supply chain software solutions. "VMI processes typically reduce inventory for both suppliers and buyers, and decrease order cycle days."
A small percentage of trading partners include consignment in their versions of VMI. In healthcare, VMI is seen as a way to ensure essential inventory is available without overstocking materials that are ultimately unneeded. For a knee replacement, for example, a surgeon can't determine the exact size replacement joint needed until the procedure, so a variety of sizes must be on hand. VMI enables the care facility to meet that need without investing in excess inventory by only paying for the joint used.
Aerospace and defense also make use of the consignment model, while in automotive it's simply delivering purchased inventory at the right cadence. "It's 'here's what we need, now figure out how to support it,'" says David Huffman, director of industry solutions for Dallas-based One Network Enterprises, a cloud-based supply chain management software provider.
In retail, fast-moving consumer goods and food staples are long-standing VMI users, but it has recently found its way to fashion, primarily for basics such as jeans. As retailers increase their willingness to share data, VMI is evolving to become more collaborative and sophisticated.
"As systems and data have advanced, and grown more precise, retail relationships are evolving naturally from VMI to a more collaborative process based on broad visibility and data sharing," says Bruce Christiansen, senior vice president for Park City Group, a Salt Lake City-based company that provides supply chain Software-as-a-Service to suppliers and retailers.
Even long-standing retail direct store delivery (DSD) processes are starting to be incorporated into supplier collaboration and data sharing programs, as opposed to separate programs that stock shelves with whatever the consumer goods manufacturer has on the truck.
"Retailers know they have to work harder to attract and retain customers," says Christiansen. "If the DSD supply chain is behaving and performing differently than the rest of the supply chain, they need to figure out how to see that. It makes for some interesting conversations—some positive and productive, and some tough."
New Markets, New Data
Advanced users are integrating the demand signals they glean from VMI earlier in their supply chain planning processes, so they can use this data to drive their own forecasts, production planning, and material flows alongside "regular" orders.
"New markets and new kinds of data are being shared," says Christiansen.
In addition to CPG/retail, automotive, and pharma, seasoned VMI users include aerospace/defense and industrial distribution, both for production materials and MRO. In MRO, VMI is increasingly linked to industrial vending. For example, Hisco Industrial Supply, a distributor of mission-critical materials, offers cloud-based VMI services to aerospace and automotive customers, remotely viewing vending equipment inventory levels via integrating with its ERP system, and receiving alerts when inventory hits certain minimum/maximum levels.
In addition to the typical VMI benefits, users of these systems can reduce shrink, gain better insight into consumption patterns, and internally assign costs to certain accounts or lines. Such analytic capabilities help suppliers add value in a competitive field.
"Industrial vending is a megatrend in the industry, and it's changing how we do business with our customers," says Larry Hollinger, sales support manager for Hisco. He predicts expansion into additional categories as these solutions evolve with capabilities such as scales and visual optics.
Another development is the rise in use of third-party logistics (3PL) providers to ensure VMI execution aligns with the plan. 3PLs take on the role of middleman, managing the data and carrying out VMI processes on behalf of clients.
But VMI isn't for every company, or every type of product. "VMI works best in operations with a steady flow of products," says Huffman. "It's harder to implement with high-demand volatility products. Vendors are hesitant to manage when they are blind to demand." For that reason, VMI is used less in the high-tech and trendy fashion industries.
Trading Partners with Benefits
As a concept, VMI has always been about driving efficiency by cutting inventory and administrative costs. Early on, companies accomplished those goals through spreadsheets and hands-on inventory management—showing up, taking a count, and refilling stock back to ideal levels. As VMI solutions emerged, and the ability to access and communicate more discrete levels of data improved, VMI became more accurate, automated, and remotely managed.
When Datalliance, a Cincinnati-based provider of VMI and related services, studied 1,000 customers across industries in 2012, and again in 2013, it found VMI processes delivered an average 22-percent increase in sales, 14-percent increase in turns, and 40-percent reduction in out-of-stocks from VMI processes. Full truckload shippers saw increases of between four and six percent in truck fill.
Transportation savings has only recently been embraced as a VMI benefit that contributes to environmental sustainability efforts. At General Mills, improved forecasting as a result of its Collaborative Replenishment program enables the food manufacturer to build and ship orders in advance (see sidebar below). The company also ships more efficiently by combining VMI processes with load optimization software, and sometimes bypassing the General Mills distribution center with direct-to-plant shipping.
With a range of product weights—from heavy jars of tomato sauce to lightweight snack foods—General Mills finds considerable opportunity to balance loads without exceeding weight limits. "The efficiencies we gain mean fewer trucks on the road, making fewer stops along the way," says Dennis Gould, manager of collaborative replenishment projects.
The sweet spot for implementing VMI processes is with customers or suppliers with sufficient volume to justify the expense. Another key characteristic is a strong, trusting relationship. VMI requires the customer to share proprietary data and entrust control of critical product flow to an outside entity. Customers must feel confident that suppliers will not abuse the privilege by pushing through excessive orders to meet quarterly sales goals.
"Companies have to commit to VMI. They are taking responsibility for the lifeblood of the customer," says Carl Hall, president and CEO of Datalliance. Two percent of Datalliance customers don't continue their programs each year due to lack of true commitment.
Other important steps to a successful program include:
- Identify the problem/opportunity. Some VMI programs are about inventory or fill rate, others are about transportation or handling costs. Most companies focus VMI programs on high-velocity products and top trading partners, sometimes expanding to smaller accounts later.
- Measure the current state through agreed-upon KPIs and identify roadblocks to improvement. Set realistic expectations for the improvements VMI will deliver.
- Set up automated processes to share in-stock levels, forecasts, and point-of-sale data at the required level of granularity and frequency. EDI is an essential tool for this. Systems that facilitate 100-percent data visibility for both supplier and customer enable the best collaboration. "A good forecast—and more importantly, a shared forecast—leads to the best results," says Christiansen.
- Segment data to track demand by specific customer or supplier, or even specific channel within that customer, using robust planning software. Systems written specifically for VMI process flows differ from general business applications such as ERP systems, which use purchase order-based structure.
- Don't set it and forget it. "VMI is a process that has to be monitored," says Hollinger. "Customers have to be involved in the process. As suppliers communicate feedback, customers can make internal changes that improve their business."
- Mine VMI data to glean insights, identify obstacles, integrate findings into production planning, and drive better results. In mature VMI relationships, trading partners exchange additional data sets to enhance the process or boost the benefits.
Automation is a key step to successful VMI, but implementing and maintaining integration with multiple trading partners can add complexity and cost. It can be particularly challenging when a company wants to look at multiple steps forward or backward in the supply chain to forecast and manage inventory needs. Some providers, such as One Network, address this issue by operating a network that enables multiple parties to view and share data.
Practitioners are confident that VMI will continue to evolve as it attracts more attention and resources. As technology advances, VMI will become increasingly exception-based, so managers are alerted only when things get out of synch.
"That allows trading partners to focus on other priorities, such as upcoming promotions or specific packaging, that make it harder to replace their VMI supplier," Bursa says. This ties into a retail trend toward joint product development with suppliers as a competitive differentiator.
Hall predicts increased use of VMI in two-step supply chains, rather than just managing inventory moving to DCs. "Retailers are making a bigger push to get suppliers involved in store-level inventory," he says. VMI will also continue to be tapped to boost transportation efficiency.
Retailers are continually refining their ability to collect data on specific consumers, and their purchasing habits and channel preferences. Eventually, they can use that data to ensure in-stock items align with the items consumers want to buy, where and when they want them. That means managing inventory not only to the shelf level, but also to the individual customer level.
Vendor Managed Inventory is well-established, but the practice has taken on new characteristics based on vertical industry needs. Common to all industries is the significant contribution of evolving technology. As the ability to share, analyze, and collaborate on inventory continues to improve, VMI will gain steam as an effective strategy to drive savings and benefits.