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Vendor Managed Inventory: Making It Work

By Bernard Milian

The promise of Vendor Managed Inventory, or VMI, is great: by sharing information and responsibility, VMI seeks to establish a mutually beneficial relationship where both sides are able to more smoothly and accurately control the flow of materials in a supply chain.

The reality is often more complicated. But first, a little history.

In the early 2000s, I was working at Motorola, and I had participated in the deployment of a new way of collaborating with our suppliers. We called it “two-way schedule sharing”. 

What was it all about? 

We shared our stocks each week with our suppliers, the min/max stock operating range we had defined, and our consumption forecasts per week and then per month for the next 12 months. 

The contract with the suppliers was simple: you can deliver the quantity you want when you want, as long as you keep our stocks in the min/max range. In addition, you must notify us of any difficulties you anticipate keeping us within this range in the coming weeks. 

We measured the performance of our suppliers on two criteria: the number of out-of-stocks and the inventory turns of the positions they managed. 

Therefore, our suppliers were fully empowered. They had the best information available each week, with maximum transparency. They felt the real need for flexibility, and roles and responsibilities were clear. 

For the industrial site whose supply chain I was in charge of, it had taken us two years to deploy this mode of operation on 80% of our supplier base—and, in my experience, neither they nor we would have gone back, as the process had calmed relations and proven its effectiveness. 

I am talking about the early 2000s. The first version of our exchange platform was on a BBS, not even on the internet yet. 

Twenty years later, the majority of the industrial companies I meet continue to place requirements with their suppliers in the form of orders for a given quantity on a given date. Then, they measure each supplier’s on-time delivery based on their ability to meet these dates and quantities. 

Worse, in some industries, supply chain executives measure the so-called “negotiated service rate”: you asked for this, but I promised you that, and I am measuring against the promised date. We are entering into a negotiation between two parties, rather than expecting both parties to share the same visibility on needs and, together, seeking to improve their mutual ability to meet them. 

It all seems anachronistic, doesn’t it? How can we respond to the volatility of our 21st century environment, as a supply chain involving a multitude of key players, if we do not share a clear end-to-end visibility at all times? If we do not put each player in our chain in charge? 

There are even some companies that replicate this process in-house, with distribution subsidiaries that place orders at the factory. This type of order is called a DRP, but we will probably come back to this in a future post… 

In the Demand Driven Planner training, we often ask the following question: do you prefer a supplier who delivers the requested quantities on the requested dates, or a supplier who never puts you out of stock nor overstock?  

In our technological age, all kinds of platforms have been developed.  

For example, we have seen new offerings based on Artificial Intelligence that promise to operate as a third party between customers and suppliers, providing replenishment recommendations but without sharing visibility on downstream needs, out of concern for confidentiality.  

Confidentiality, black box algorithms—is this really the level of collaboration that’s required?  

With the cloud at our disposal to facilitate exchanges, it is easy to establish supplier portals. Yet a large majority of companies still have difficulty passing the milestone of setting up a real shared supply management (Vendor Managed Inventory – VMI), whether upstream or downstream, to replenish customers stocks. 

There are exceptions, of course. The practice of VMI has been deployed within some sectors, for example in retail, but it remains the exception in many parts of the industry and seems out of reach for SMEs. Yet, VMI was developed by Walmart and Procter & Gamble in the 1980s, some 40 years ago. 

Adopting DDMRP does not imply implementing VMI with your suppliers. You can continue to send orders defining a quantity and a date, with an improved signal and much more visibility on your side. 

But you will probably also be encouraged to share this visibility with your suppliers. It is so simple to do, for companies of any size! All you have to do is grant your suppliers access to your Replenishment+ cloud platform for the items they provide you with, give them the rights you want (viewing only or also triggering orders), it’s free and done!  

Ah yes, train them a little anyway so they understand the red-yellow-green zones and the expected behaviors… 

From there, your suppliers will have the same view as you, will know which items to start production first, and will have execution alerts to take timely actions and avoid any disruption, with perfect mutual transparency. It is just as easy! 

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