March 2002 | Commentary | IT Matters

VMI Heals Distributor/Manufacturer Mistrust

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Imagine if your doctor had real-time information about your blood pressure, heart rate, cholesterol level, blood sugar, and brain wave patterns and could intervene remotely at any time. Medical technology hasn't developed quite to that point yet, but enterprise software has. It's called vendor-managed inventory (VMI).

A Healthy Dose of VMI

VMI has a healthful side effect: it can cure an ailment that has been almost epidemic over the past few years—the mistrust that the Internet has engendered between distributors and manufacturers.

Many distributors have become leery of manufacturers who they fear will use the Internet to start selling directly to end users. Manufacturers are apprehensive because the Internet gives distributors easy access to a large pool of suppliers with whom they can bargain for the best price and delivery terms.

In VMI, the manufacturer is responsible for maintaining its customer's inventory levels. Essentially, the distributor provides the manufacturer with inventory and sales history records and helps develop an inventory plan. The manufacturer gets weekly, or even daily, inventory and sales reports from the customer, then ships product and fine tunes its inventory plan on the basis of these reports.

Both partners in a VMI collaboration can benefit in multiple ways. In general, they save money through greater operating efficiency, better inventory management, and the availability of working capital that was previously tied up in tangible assets. The manufacturer can plan production and fill orders more accurately and more quickly because it can forecast demand. The distributor has less inventory on hand and is free of the cost of planning and ordering. It also enjoys better service from the manufacturer and serves end users better by delivering the right products to the right places at the right times.

The Road to VMI Well Being

To do vendor-managed inventory well, a manufacturer needs an enterprise information system that:

  • Has reliable forecasting tools to analyze demand.
  • Gives the distributor information to help mark replenishment items as available to promise as of the delivery date.
  • Has built-in business intelligence software to analyze data and show tangible results to the distributor.

The distributor's enterprise software should enable it to:

  • Automatically provide information about inventory and sales to the manufacturer, so that it doesn't have to re-key information.
  • Allocate items scheduled for delivery to customer orders.
  • Schedule shipments directly from the manufacturer to the customer to further streamline the process.

It would be difficult to implement a VMI strategy using a traditional business system, especially if it is more than five years old. These systems were typically not designed to operate outside the four walls of an enterprise. With a modern, robust enterprise information management system, however, a distributor or manufacturer has a solid foundation for a VMI partnership.

Factors for System Success

In addition to distributor- and manufacturer-specific functions, an enterprise information management system should:

  • Have import/export utilities to convert the distributor's data into a format that the manufacturer's system can use.
  • Be able to manage stock at the distributor's location.
  • Be able to run on the Internet, with any part of the system operable in web browser mode. The system must support internal communications, most typically using XML.
  • Have an application programming interface (API) available to other software developers so that they can write code necessary for information sharing.
  • Be well parameterized so that the user can customize the software to match business processes.

If planned well and supported by a flexible enterprise information management system, VMI can help middle-market manufacturers and distributors build long-term collaborative relationships, streamline operations, and use the Internet as a business tool to increase competitiveness.

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