October 2001 | Commentary | Supply Chain Technology

VMI: Managing Supply Based on Demand

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Vendor Managed Inventory (VMI) is not a new application, but its role in today's supply chain is attracting more and more interest.

Driven by a need for greater competence in supply chain processes, the roles some supply chain partners play are shifting away from traditional inventory management. Now, the vendor tracks the quantity of products transported to distributors or other outlets and has the visibility to know when more products need to be sent. Replenishment is automatic and only occurs when there is a need.

This system requires the electronic transfer of pertinent inventory data over a network. VMI has become a necessary planning tool that focuses on both the replenishment and fulfillment processes. Food manufacturers such as Kraft and Motts, as well as chain-store companies including Wal-Mart, have caught the VMI bug.

Application providers such as IFS, a top-five global business applications supplier best known for its comprehensive and modular extended enterprise Enterprise Resource Planning (ERP) applications, have begun developing their own pre-packaged VMI product suites.

"VMI is not new to the industry or to ERP. It is, however, drawing much more interest than it has before," says Brian Johnson, VMI specialist and a consultant for IFS. "There are also varying degrees of support for ERP packages."

Tight and Virtual Integration

Many companies are concerned about VMI's compatibility with existing ERP systems. At IFS, Johnson notes, "the connections to VMI are tightly integrated within the IFS VMI product suite. The product's extensive XML support makes connecting with other systems much easier. In addition, the IFS collaborative portals provide virtual integration both up and down the supply chain."

Although it offers scalable solutions for any size enterprise, IFS targets mid-sized companies, where demand is greatest.

"IFS typically does not sell to small companies—those with less than $25 million in revenue—simply because they do not have the same complex supply chains that mid-sized and large companies have. The value proposition is not as strong compared to other VMI solutions on the market," says Johnson.

IFS's VMI application is more advantageous for mid-sized companies because it fully supports both customer and supplier VMI, where the company exists somewhere in the middle of the supply chain.

"This is the notion of virtual integration from demand through supply," adds Johnson. "Large companies are typically at the beginning of the supply chain and may not be able to use the product's customer-based VMI support."

IFS President and CEO Bengt Nilsson sees a similar trend. "This year, our mid-sized customers are facing great pressure from their board of directors and investors who are not approving budgets for tedious and time-consuming "big bang" implementations. The supply chain is a complex beast, and VMI is another part of it, or a part redefined."

Still, VMI is an integral part of both the supply and demand chain, and is central to the virtual integration of the extended enterprise, regardless of company size.

Supporting Existing Capabilities

VMI does not displace functionalities but instead adds more robust support to existing capabilities.

"Areas such as supplier scheduling become less critical for those suppliers that use VMI," says Johnson. "That said, we have discovered from our customers that not all their suppliers need this kind of enhancement, and consequently do not need to be on a VMI program."

So, why should a business consider implementing an inventory solution such as the one IFS offers?

Johnson concludes that there are two distinct advantages to using the IFS VMI system. "First, the VMI solution addresses both the supply and demand chain, which is similar to the water distribution model," Johnson notes. "Second, the IFS solution was created from the extended enterprise perspective instead of the ERP-centric perspective. It accommodates the needs of the organizations involved with VMI."

The water distribution model concept is the way IFS describes its own VMI flow of information across the supply chain. The supply-on-demand processes have the ability to flow across intra- and inter-company links and create real-time hookups within the organization for both supplier and customer.

Additionally, VMI helps transfer ownership of inventory to the vendors, allowing companies to take extraneous storage costs off their balance sheets.

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