One way to fully implement the lean philosophy is to utilize a strategy called vendor managed inventory (VMI), which involves allowing the supplier to take full responsibility for replenishing purchased inventory. This eliminates the need for the buyer to handle purchasing planning and order management, ultimately reducing both time and cost. For the supplier, the aim is to enhance production and delivery flexibility while maintaining forward visibility, ultimately enabling the buyer to meet their goals in the shortest time possible and with minimal cost.
VMI Mechanics
Vendor Managed Inventory – Means of optimizing supply chain performance in which the supplier has access to the customer’s inventory data and is responsible for maintaining the inventory level required by the customer. This activity is accomplished by a process in which resupply is done by the vendor through regularly scheduled reviews of the on-site inventory.
The traditional method of buyers setting purchase requirements and transmitting them to suppliers is replaced by a new approach in Vendor Managed Inventory (VMI). Here, suppliers take charge of determining which items need replenishment, transmitting the requirements, and delivering products without direct oversight from buyers. To achieve demand visibility, various technologies such as point-of-sale (POS) information or MRP output can be used to relay data directly to the supplier’s planning system via electronic data interchange (EDI) or the internet. After product delivery, the supplier can invoice the customer directly via computer-to-computer transactions. The ultimate payment method is direct debiting, where the invoice is pre-authorized for payment and funds are automatically transferred to the supplier’s receivables without manual payables activities. VMI relationships rely on mutual trust and solid contracts between the two parties. Although buyers will no longer directly manage the purchasing process, they are still expected to closely monitor activities and collaborate with suppliers to ensure continuous improvement in replenishment processes.
Consignment
In this arrangement, the supplier physically delivers the product to the customer for use, without receiving payment until after goods are used or sold but retains title to the product until the customer uses it in production or sells it. The supplier replenishes inventory through a periodic review or by receiving notification from the customer. Careful consideration must be made differentiating vendor-owned versus vendor-managed.
On-Site Representation
In this approach, the supplier deploys its own inventory planners at the customer’s location. These planners collaborate with the customer’s planning and purchasing teams to integrate their efforts. Their main responsibility is to utilize the customer’s inventory planning data to directly place replenishment orders with their own company, without requiring the customer’s involvement.
Supplier Co-Location
This method involves locating suppliers on the premises of the manufacturer. The main advantage of this approach is that they are conveniently located on site. The manufacturer can be actively involved in the business and become an important part of the process, whether it’s during the design phase or to facilitate production scaling during growth.
1. Typically locates a supplier or multiple suppliers within a single location.
2. Can bring together people or groups in related roles for product and process innovation, to generate ideas and design new products, or to conduct prototyping and product qualification tasks.
3. Level of integration can vary.
4. Can be market-driven or might involve exploiting technology-based products and services.