What is Vendor Managed Inventory (VMI)?

I've seen the term Vendor Managed Inventory (VMI) used in about a million different manners now, and I just realized that the term is so liberally used, it can be cut up into various pieces that might make more sense for those uninitiated with or considering a VMI move in the supply-chain management world.  I don't want to argue the merits or demerits of VMI, I could probably write a book about it (whew! Looks like I don't have to?), but my take is that it's broken down into a few categories (I'm making it really simple for quick guide like sake):

Vendor Managed Inventory – Supply Side

Vendor Managed Inventory (VMI) in its purest form is when a vendor (supplier of goods) manages the inventory level AND stock level of its goods on a buyer’s (demand side) premise.  That is to say, they are responsible for scheduling / delivering a set amount of their inventory to a buyer’s stock room, and also re-stocking the buyer’s shelves with their goods.  Requisite levels of inventory are determined by sharing point of sales data (POS) and analyzing it in order to predict the best inventory level possible for the buyer based upon evaluated sale trends. 

Generally this system isn’t used as it requires the supplier of goods to be on site continually to make sure shelves are stocked.  This could mean a permanent resource on site or a daily visit to the buyer's location to ensure shelves are stocked and consumers have access to buy the goods.  With expensive, large, or slower moving goods, these human resource needs might not be as demanding, but the risk of losing a sale is very real if the good in question is not available to the customer seeking the product.

Vendor Managed Inventory – Supply/Demand collaboration

This is a growing, and usually more successful, form of Vendor Managed Inventory (VMI).  In a collaborative effort, both sides share sales data and analysis in order to fully optimize their inventories and sales opportunities.  In such cases, both sides divide up responsibilities (by agreement) and do their best to support each other as means allow (this can mean a lot of human communication, physical visits to buyer’s site by vendor, and  even sharing human resources at loading bays or even stocking store shelves, to get the job done).  Goods may be on consignment, delayed payment (90 day pay period on invoices), or purchased outright -- depending on agreement.

Vendor Managed Inventory – Buyer side

This is probably the most common form of Vendor Managed Inventory (VMI).  In Buyer side centric models, Vendors are usually leaving goods on consignment at the Buyer’s premise, and/or invoicing for a 90 day or more period before getting paid ... giving the demand side buyer time to make sales and earn cash before actually paying for the goods.  When this happens, usually the buyer is the sole entity responsible for keeping shelves stocked in order to make sales.  However, depending on the relationship and agreement, this type of relationship may demand that the supplier take back all goods not sold or alternatively that the buyer pay for the goods regardless if they’ve been sold or not.  Not the best system for creating trust and a positive business relationship among partners (hence why it’s in slow decline), but it’s still today the most dominate form of VMI.  Large players like Walmart almost use exclusivey this model, because they can.

Buyer Managed Inventory

This method is all but dead in the FMCGs business to all but the smallest players.  In this relationship, the buyer is wholly responsible for pre-purchasing goods to sell, incurring losses on items not sold, and responsible for all stocking/restocking of goods that are customer facing.  The vendor plays no role in the inventory process aside from dropping off goods at the bay doors of the buyer’s place of business.

Of course, there are hybrids in-between the above -- each one has a positive or negative element to them that might be better or worse for the supply or buyer involved.  Which one do you use?  Or which hybrid model do you use or do you think is best?  As stated above, these are mainly in the FMCG world, but they could apply to others as well.  Thoughts?

 

Inventory vs. Stock

In my entrepreneurial quest to redefine how shelf stock levels are managed, I'm coming into a rather interesting dilemma in choice of words to use in the English language.  Generally, I am using "stock" to define items on a shelf for sale and "inventory" for items that will be for sale, but are not yet customer facing (ie... in the stockroom!?!, on a truck being delivered to a store, etc.).


As an example, if something is "out-of'stock" what does that mean to you?  According to its general definition, it means the store no longer has that item available for sale.  However, what is it called when the customer facing shelf is empty with the item you want to buy but the stock room is full of that item?  In the this article about Walmart's inability to keep its shelves full with goods, they refer to it as "out-of-stocks".  You see the confusion?  They have goods in the back stockroom, but the goods are not on the shelves for sale.  Do those of you in retail have different words for these two issues, because I'm not able to find a clear separation between them.  I've seen somebody refer to missing items on shelves as "stock gaps" but I don't see it being used anywhere else.

For the solution I'm working on, I'm only concerned with fixing the gap that the customer sees.  "Stock gaps" or "out of stocks" or whatever you want to call them, is what I'm trying to fix.  I am not (yet) trying to make my own inventory management system, as there are a plethora already out there (albeit most of them are horrid and have poor usability and data analytics).  So, in the meantime, I'm focusing on stock levels, not inventory levels, if that makes any sense at all.

In the VMI world, the two words stock and inventory are almost used interchangeably, making it even more confusing and even more difficult for me to articulate the problem I'm trying to solve.  Maybe the specific words or meanings exist and I just don't know them, if so, I'd like to hear them so I can use the proper words in describing what I'm trying to solve. Anybody?

"Lean Manufacturing" in software ...

The term Lean Manufacturing has been around for a while, but it seems that it has been re-discovered by a few marketing teams in a few of the larger ERP systems (I hate this term ERP, but I'll use it for reference) solution providers, and I'm getting spammed about how to "make my business 'leaner'".
I have no intention to drill deep into Fordism at this point, as it is a really exhaustive topic (and well worth researching if you're unfamiliar with it) and not really suitable for an ad hoc blog post. What I will say (and to really water it down and simplify it) is that in terms of software solutions for logistics/production companies, is that the goal of any information system you implement should aim to reduce the amount of manaual work employees perform or remove the need for any manual work altogether.

The great majority of systems (ERP, SCM, MM, IS, --> insert acroynm here) capture information well (including the system the company I work for implements), but they do a poor job of automating processes or removing the "decision time" process. In other words, you collect a plethora of information about, say, what items are in your warehouse, but very few of these systems are ordering supplies for themselves (ie... when a store's shelf is empty or the supply depot is almost exhausted, very few outfits have automated re-ordering of goods in demand, and still depend upon shop assistants and students to do "inventory" or "by-site" management of goods ordering).

There are a few systems out there (not being fully used by most of their customers), that automat the sourcing process, including the contracting process, ordering process (by Demand), etc ... but for the most part, especially in this part of Europe, product chain management is extremly poor. The local giant Tesco or Hypernova or Albert should NEVER run out of something (unless it's seasonal), but they do all the time. For example, items I buy all of the time seem to run out, and isn't replaced for days, sometimes even weeks -- even when their other stores on the other side of town have a shelf full of the same goods. "Real Time" analysis and movement of items by demand shouldn't be some rare function of an information system and a comapany's procurement organization, it should be the norm.

The point is, if you are a manager of a large company needing an information system to help you capture AND improve your current production/procurement processes, just don't follow the other sheep and invest in "popular" tools (especially those subsidized by a government, cough, cough ...) ... try doing a bit more research first, and if you're completely lost, contact a professional outside of those companies to help you garner your proper requirements (it doesn't have to be me! :P) ... you'll be glad you did.