Inventory Management Models Overview
Industry prefers VMI over Buyer Managed Inventory (BMI), as this offers lesser risk in transportation and thereby reducing their inventory and production costs.Both industry and vendors adopt a strategic VMI model, where both the supply risks and profit impact are high, as the decision making on inventory replenishment is still with the vendor.
Inventory Models Overview
- BMI: BMI is the traditional way of product replenishment, where the buyer holds the inventory and manages it by themselves
- CMI: CMI is a model where an order placed by the vendor is not considered final until approved by the buyer
- VMI/VRI: In the VMI and VRI process, the order generated by the vendor on the buyer’s behalf is a firm order to deliver product and bill the customer. In VMI, the vendors also have the capability to decide on inventory assortment apart from replenishing
VMI or VMOI is a collaboratively managed order replenishment solution that provides tools for the suppliers to create optimized delivery schedules, which increases visibility, thereby increasing the forecasting accuracy.
Pre-requisites to VMI
In a multi-vendor VMI model, industry prefers to engage with a 3PL, who manage the inventory from vendors and also monitor the performance of vendors.
- VMI is best suitable for high-volume items with relatively stable, predictable, and repetitive demand
- Products that are suitable to VMI should ideally be standardized, which includes identification of products (e.g., barcodes)
The pre-requisites for VMI is generally classified into three characteristics, such as buyer-related, product-related, and vendor-related.
- Stable growth
- High transaction costs
- Good information and communication systems
- Ability to share information
- Purchasing is not a core competency
- Standardized products
- Repeating products
- Standard product identification
- Low demand variance
- Demand is forecasted and stock levels monitored
- Trust/long-term relationships
- Advantages to both vendor/buyer on engagement
- Higher percentage of orders constituted by the vendor
- Vendors capability to manage the inventory and adopt supply chain techniques
- Integrated information system
Industry ideally keep their min/max levels dynamic in order to achieve higher inventory turns and also to identify which products needs to be adjusted based on demand.
Setting up of min/max inventory levels is the most critical step in implementing VMI, as stock replenishment from vendors is based on monitoring of inventory levels and also vendor’s VMI performance is measured based on their replenishment capabilities
The three main enablers for implementing VMI solutions are setting up of min/max stock levels for VMI products, determining the delivery units, and sharing of product master data with the vendor.
Min/Max Stock Levels for VMI Products
- The most important for setting up VMI process is to determine min/max stock levels for products. The “Min” value represents a stock level that triggers a reorder. The “Max” value represents a new targeted stock level following the reorder
- The following parameters are considered in setting up the min/max levels
- Service level required
- Historical demand
- Item shelf life
- Order frequency
- Physical size and storage costs
- Stock out costs
- Changes in min/max levels are required while setting up VMI to achieve higher inventory turns and also to minimize stock outs
- Min/max values are also represented in the form of DOS (days of sales) instead of units of stock, as it adjusts the targets automatically based on the demand
Determining Delivery Units
- The next step is to define the ideal replenishment quantity for each product, taking into account the existing stock levels and availability requirements for production
- Weekly consumption is compared with the standard pallet size, based on historical data, and this defines the total shipping volume and the frequency at which the products are delivered
- Industry generally prepare the delivery schedule based on the requirements and additional delivery slots is prepared in order to ensure that vendors do not face delays in case of increase in capacity
Product Master Data
- An accurate master data management is a prerequisite for a successful VMI solutions, as product master data offers consistent and uniform set of attributes that describe the products, which includes identifiers, ordering and packaging information, etc.
- Product master data needs to be precisely synced between vendor and buyer to ensure smooth operations. Solutions, such as Product Master Data (PDM) solutions or Product Information Management (PIM) solutions, are preferred for integration
- In addition to product master data, location master data is also required in the VMI process that delivery points are uniquely identified for an efficient process
- The best-in-class product data management (internal and across the supply chain) can have considerable impact on revenue and thereby increasing the profit
Best practice adopted by Industry is to standardize the inventory levels, this will reduce stock outs and monitor their inventory levels much efficiently.
Delivery schedules are ideally prepared by industry; vendors prefer to physically monitor the inventory at client’s location and then replenishment orders are planned based on the inventory levels.