Inventory

Vendor Managed Inventory

Introduction

It is important for the firms to manage their inventory to run the operational activities efficiently and meet the market demand accordingly. In relation to this, Vendor Managed Inventory (VMI) is also a valuable business model that allows the buyer to provide the needed information to the supplier or vendor regarding the product for maintaining the agreed inventory of the materials to meet the demand (Liao et al., 2011).  The thesis statement of this essay is that the VMI is valuable for the firms to manage inventory and conduct the operations in efficient way. Regarding, this essay critically talks about the concept of VMI and discusses its advantages and disadvantages.

Pros and cons of VMI

In the views of Khan et al. (2016), VMI is a significant approach to address the bullwhip effect that is related to large fluctuations in the orders to the supplier than sales to the buyer as it is helpful to eliminate the one layer of decision making and eliminate the delays in the flow of information in manufacturing industry. These both factors cause the distortion in supply chain.  These findings are also consistent with the outcomes of study conducted by Disney and Towil (2003) as it is found that VMI is an effective supply strategy where the information related to sales and inventory is shared by the customer with the supplier. This strategy also allows the supplier to make inventory replenishment decisions for their customer on time. This study also provides the example of Wal-Mart and Procter and Gamble in which P&G was allowed to make decisions related to inventory replenishment for Wal-Mart. In this, Wal-Mart provided the required information on inventory and sales. It helped the firm to enhance the service level and minimize the inventory management costs (Disney and Towil, 2003). Meanwhile, the study of Mangan et al. 2010) argues that this strategy is not always successful due to lack of full access to sales forecast or future demand requirements provided by the customers.  The manufacturers are not interested to share complete information that reduces the effectiveness of VMI in terms of inventory management. But, Liao et al. (2011) revealed that if the demand information is shared with the suppliers, then it is easy for the supplier to provide the inventory on time as per the demand in the market. It is helpful to reduce the cost of inventory management in the supply chain. On the flip side, it can be evaluated from the research of Sari (2008) focusing on comparison between VMI and CPFR strategy that CPFR is more effective strategy to manage inventory than VMI to get higher advantages. A study by Mateen and Chatterjee (2015) had projected that VMI is not a perfect model to manage inventory because it is not easy to find out the efficient vendor who could manage all the inventory data in effective way. However, the study of Kazemi and Zhang (2013) highlights the benefits obtained from VMI in supply chain and finds that the use of VMI enables the firm to reduce loss in stock out. It is because if the product goes out of stock due to high and sudden demand of the product, it may cause high loss to the manufacturing company. The use of this approach is effective to avoid such situations and enhance the business profitability. Conversely, Borade and Sweeney (2015) provided different views and argued that the information sharing to the vendor may cause data privacy and security issues for the company. The use of VMI allows access to the non-employee or third party that may cause lack of control and threat to the company. Relating to this, Dong et al. (2014) depicted that if the manufacturer shares the confidential information to the vendor; it may be used for the wrong purposes and may cause reputational and financial risk. Further, Lee et al. (2016) found in the research that the high reliance on a supplier for inventory management may lead to higher prices, quality reduction and other supplier-related issues.

Differently, Rad et al. (2014) condemned that the use of VMI is advantageous to reduce the need of having the safety stock leading to reduction in purchasing costs. It also make the purchasing process and ordering process faster because the purchasing department has to spend less time on determining the purchasing orders. The study of Bazan et al. (2014) provides similar results by recognizing that there is no need of making corrections and reconciliation in purchasing order that is effective to reduce purchasing costs. Further, it can also be found in the research of Liao et al. (2011) that the use of VMI can be effective to reduce warehouse costs as lower inventories require less warehouse space and warehouse resources that contributes in the reduction in warehouse costs. In support of VMI approach, the findings of Kamalapurkar (2011) also reveal that it is also useful for the firms to use VMI as it allows the organization to gain access to the point of sale (POS) data that helps to make better and easier forecasting.

Improvements in VMI

On the basis of the above analysis, it can be determined that there are some issues related to security and data privacy, lack of control, high dependence on supplier and low access to the information in using the VMI. It is important for the manufacturers to share the demand forecast and should be involved in decision making. It can be helpful for the vendor to make informed decisions (Mangan et al. 2010). On the other hand, Kazemi and Zhang (2013) provides insights on better use of VMI by stating that there is need to make a better partnership between the supplier and customer to access the required information. In addition, it can be helpful to keep communication channels open. Both parties including supplier and manufacturer need to communicate the goals and how they will realize these goals.

Summary

Finally, it is worth pointing out that the VMI is an effective approach to manage inventory at low cost. VMI is valuable to get the demand information from the customers and inform the supplier to manage the inventory efficiently. Apart from this, it is also summarized that VMI helps to reduce the purchasing and warehouse costs and improve the production efficiency as per the market demand. But at the same time, this approach may cause security and data privacy, lack of control, high dependence on supplier and constraints in terms of low access to the information. In order to solve these issues, it is required for the firms to develop better communication with the supplier and share the information to the suppliers effectively along with better relationship development.

References

Bazan, E., Jaber, M. Y., Zanoni, S., and Zavanella, L. E. (2014) ‘Vendor Managed Inventory (VMI) with Consignment Stock (CS) agreement for a two-level supply chain with an imperfect production process with/without restoration interruptions’, International journal of production economics, Vol.157, pp.289-301.

Borade, A. B., and Sweeney, E. (2015) ‘Decision support system for vendor managed inventory supply chain: a case study’, International Journal of Production Research, Vol.53, pp.4789-4818.

Disney, S., and Towil, D. (2003) ‘The effect of vendor managed inventory (VMI) dynamics on the Bullwhip effect in supply chains’, Internationa Journal of Production Economics, Vol. 85, pp. 199-215

Dong, Y., Dresner, M., and Yao, Y. (2014) ‘Beyond information sharing: An empirical analysis of vendor‐managed inventory’, Production and Operations Management, Vol.23, pp.817-828.

Kamalapurkar, D. (2011) Benefits of CPFR and VMI collaboration strategies in a variable demand environment. Western Michigan University.

Kazemi, Y., and Zhang, J. (2013) ‘Optimal decisions and comparison of VMI and CPFR under price-sensitive uncertain demand’, Journal of Industrial Engineering and Management, Vol.6, pp. 547.

Khan, M., Jaber, M. Y., Zanoni, S., and Zavanella, L. (2016) ‘Vendor managed inventory with consignment stock agreement for a supply chain with defective items’, Applied Mathematical Modelling, Vol.40, pp.7102-7114.

Lee, J. Y., Cho, R. K., and Paik, S. K. (2016) ‘Supply chain coordination in vendor-managed inventory systems with stockout-cost sharing under limited storage capacity’, European Journal of Operational Research, Vol.248, 95-106.

Liao, S. H., Hsieh, C. L., and Lai, P. J. (2011) ‘An evolutionary approach for multi-objective optimization of the integrated location–inventory distribution network problem in vendor-managed inventory’, Expert Systems with Applications, Vol.38, pp.6768-6776.

Mangan, J., Lalwani, C., Butcher, T. and Javadpour, R. (2012) Global logistics and supply chain management (2nd Ed). John Wiley and Sons, Chichester.

Mateen, A., and Chatterjee, A. K. (2015) ‘Vendor managed inventory for single-vendor multi-retailer supply chains’, Decision Support Systems, Vol.70, pp.31-41.

Pasandideh, S. H. R., Niaki, S. T. A., and Nia, A. R. (2011) ‘A genetic algorithm for vendor managed inventory control system of multi-product multi-constraint economic order quantity model’, Expert Systems with Applications, Vol.38, pp.2708-2716.

Rad, R. H., Razmi, J., Sangari, M. S., and Ebrahimi, Z. F. (2014) ‘Optimizing an integrated vendor-managed inventory system for a single-vendor two-buyer supply chain with determining weighting factor for vendor׳ s ordering cost’, International Journal of Production Economics, Vol.153, pp.295-308.

Sari, K. (2008) ‘On the benefits of CPFR and VMI: A comparative simulation study’, International Journal of Production Economics, Vol.113, pp. 575-586

 

 

 

 

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