10/23/02

Six Steps to a Successful VMI System Compiled by: Kelly Wright, SCRC

Vendor Managed Inventory (VMI) systems came into vogue in the 1990’s as a way to decrease supply chain costs. Unfortunately, last year’s inventory crises left many manufacturers greatly disappointed when their new systems did not create the promised return on investment.

Robert Schoenthaler, VP of SC solutions at KPMG Consulting Inc. has pointed out, “The lesson learned in supply chain management is that it is a journey, not something that can be solved in a single project. In the 1990s there was an explosion of growth in planning tools. Now the question of ‘how do I execute’ is becoming more important.” (1)

VMI is not a perfect solution to inventory problems. Susan Cohen Kulp, a researcher at Harvard University, recently finished a study on the relationship between VMI systems and higher profits. Not surprisingly, she found that implementation does not always return better results than a traditional supplier relationship. Her study found that information precision and reliability, combined with an effective sharing mechanism, were the key factors in obtaining higher supply chain profits.

So, how do you implement a successful VMI system?

1 – COMMUNICATE expectations of all parties. Customers and suppliers must make the effort to sit down and discuss the goals and objectives of implementing VMI. The importance of this step cannot be overstated. Both parties’ hardware and software requirements must be identified, and an understanding must be reached in terms of how both companies’ systems will communicate. Then a plan for implementation must be mapped, specifically identifying each party’s financial and other responsibilities.

2 – Customer must commit to sharing PRECISE information. Suppliers must have visibility into the customer’s internal sales and inventory information. Without accurate data, ability to quickly meet demand will be impaired.

3 – Suppliers must ensure RELIABLE transmission, receipt, and use of information. To facilitate step 2, the supplier must be able to guarantee that the customer’s trusted information will be communicated, received, and utilized securely and thoroughly to meet the designated needs. Time should be spent during the planning phase discussing information precision and reliability.

4 – Sufficiently TEST systems before going live. As with any new system, testing will uncover any bugs or inefficiencies and can help to avoid future headaches.

5 – Expect implementation to be a PROCESS not a project. Remember that there is no on/off switch. Adjustments will have to be made as demand levels fluctuate, and no system will be perfect 100% of the time.

6 – Plan to spend sufficient TIME AND MONEY to make it work. Most successful VMI systems we’ve read about took 2-2.5 years to put into operation, and cost hundreds of thousands of dollars for IT and training. Spending (or finding) the time to create a comprehensive system can be a challenge.

tWe found two compelling stories about companies who have recently gone public with their VMI successes.

ST Microelectronics N.V. and Hewlett Packard began using their well-planned VMI system in the summer of 2001. Gilles Sanchez, ST’s supply chain concept owner, said his company has “cut product lead time in half, reduced buffer inventory from five to two weeks, and eliminated 80% of manual transactions" (3). Although the returns are terrific, it must be noted that HP and ST worked together for two years to make the system succeed. They say their secret to success was their ability to connect their incumbent IT infrastructures and build off of the existing platform.(4) Click here to see the article.

Sun Microsystems has also figured out how to make VMI successful, but also spent two years in the planning phase. Half of its $350 million fiscal year inventory reduction is a direct result of the new VMI system (the other half, they say, is due to last year’s general drop in demand). Sun created a pull system with its suppliers. When a customer places an order, a signal is sent to suppliers who are expected to deliver replacement raw materials within four hours, or finished goods within 24 hours. Sun provides suppliers weekly materials, six-quarter forecasts, and month-out views of actual PO data. Their key to success was spending enough time planning with suppliers before moving to the implementation phase.(5)Click here to see the article.

What happens when the economy turns around and we start seeing shortages again?

Ismini Scouras of EBN thinks suppliers may not be as motivated to implement VMI when demand picks up and they no longer have to differentiate themselves as they do in today’s environment(6). Scouras suggests that inventory management should be taken on by distributors instead of suppliers who may not demonstrate a satisfactory level of commitment.

Some distributors already perform VMI tasks, but many are not yet technically equipped to manage the service. Another option is to task third-party logistics providers (3PL’s) with managing inventory. Andrew Gort is executive vice president of global supply chain management at Celestica, Inc. and says his company “began to use 3PLs three years ago when distributors didn’t provide that service without having to place an order for components” (7).

Whoever ends up owning the VMI process, one thing is clear. Communication is the key to successfully implementing a vendor managed inventory program of any kind. Precise and reliable information must be shared and tested throughout the implementation process which will require substantial time, money, and effort.

(1) Ghost inventory frustrates supply chain reform effort. Jennifer Baljko Shah and Jack Robertson, EBN, 4/29/02, Issue 1310, p. 1.

(2) The Effect of Information Precision and Information Reliability on Manufacturer-Retailer Relationships. Susan Cohen Kulp, Accounting Review, July 2002, Vol. 77, Issue 3, p. 653.

(3) ST, HP VMI program hitting its stride. Jennifer Baljko Shah, EBN, 4/22/02, Issue 1309, p. 42.

(4) ST, HP VMI program hitting its stride. Jennifer Baljko Shah, EBN, 4/22/02, Issue 1309, p. 42.

(5) Sun clears out inventory costs through new supplier program. Jennifer Baljko Shah, EBN, 3/25/02, Issue 1305, p. 1.

(6) The Success of VMI Programs Depends. Ismini Scouras, EBN, 9/24/02.

(7) Distributors aim to manage suppliers’ VMI programs. Laurie Sullivan, EBN, 9/20/02.

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