Cure Supply Chain Ills With Vendor-Managed Inventory

By Bill Owens
Business Development Manager, Adonix

Imagine what it would be like to have your health continuously monitored without being hooked up to machines or even having to wear an uncomfortable gadget. Your doctor would always have real-time information about your blood pressure, heart rate, cholesterol level, blood sugar and brain wave patterns and could intervene remotely at any time to keep you healthy.

Medical technology hasn't developed quite to that point yet, but enterprise software has. It's called vendor-managed inventory.

Vendor-managed inventory (VMI) has a healthful side effect: It can cure an ailment that has been almost epidemic over the past few years—the mistrust that the Internet has engendered between distributors and manufacturers. Many distributors have become leery of manufacturers who, they fear, will use the Internet to start selling directly to end-users. Manufacturers, especially makers of undifferentiated products such as bulk chemicals or plastic sheet, are apprehensive because the Internet gives distributors easy access to a large pool of suppliers with whom they can bargain for the best price and delivery terms.

In vendor managed inventory, the manufacturer is responsible for maintaining its customer's inventory levels. In a nutshell, the distributor provides the manufacturer its inventory and sales history records. The distributor and manufacturer collaborate to develop an inventory plan that the manufacturer uses as a rough guideline for what to produce when. The manufacturer gets weekly, or even daily, inventory and sales reports from the customer. The manufacturer ships product on the basis of these reports and uses them to fine tune its inventory plan.

Both partners in a VMI collaboration can benefit in multiple ways. In general, they save money through greater operating efficiency, better inventory management, and the availability of working capital that was previously tied up in tangible assets.

The manufacturer can plan production and fill orders more accurately and more quickly because it can forecast demand. That can help reduce its material costs and overhead (because it has less product sitting around waiting to be shipped and fewer returns of unsold product).

The distributor in the VMI collaboration has less inventory on hand and on its books at any given time and is free of the cost of planning and ordering. It enjoys better service from the manufacturer and serves its end users better by delivering the right products to the right places at the right times.

Giant retailers and consumer products companies such as WalMart and Procter and Gamble pioneered VMI, using expensive private computer networks to transfer inventory data in electronic data interchange (EDI) formats. With the advent of the Worldwide Web, however, more and more small and midsize manufacturers and distributors can take advantage of VMI, too.

To do VMI well, a manufacturer needs an enterprise information system that:

• Has reliable forecasting tools to analyze demand. To produce accurate inventory plans, the forecasting tools should be able to account for events such as product promotions, new product launches that might affect demand for old products, labor strikes, and the like.
  
• Gives the distributor delivery information so that it can mark replenishment items as available to promise as of the delivery date.
  
• Has built-in business intelligence software to analyze data and demonstrate tangible results to the distributor (e.g., service levels, turn rates, inventory cost reductions, etc.).

The distributor's enterprise software should enable it to:

• Automatically provide information about inventory and sales to the manufacturer, so that the manufacturer doesn't have to re-key it into its own information system. A distributor can share information either through EDI or by establishing an Extranet, a company Web site that authorized outsiders, e.g., the manufacturer, can enter with a password. The advantage of an Extranet is that it permits real-time information exchange between supply chain partners.
  
• Allocate items scheduled for delivery to customer orders.
  
• Schedule shipments directly from the manufacturer to the customer to further streamline the process.

It would be difficult to implement a VMI strategy using a traditional business system, especially if it is more than five years old. These systems were typically not designed to operate outside the four walls of an enterprise.

With a modern, robust enterprise information management system, however, a distributor or manufacturer has a solid foundation for a VMI partnership. In addition to the distributor- and manufacturer-specific functions describe above, to ensure efficient, accurate VMI, an enterprise information management system should have the following features:

• Have import/export utilities to convert the distributor's data into a format that the manufacturer's system can use, e.g., to and from standard EDI reports. These reports include 852 (Product Activity), which the distributor sends to the manufacturer to reflect new quantity and transaction information, and 857 (Advance Ship Notice), which the manufacturer sends the distributor to provide the content of the shipment and shipping date. The utilities should also be able to trigger actions within the manufacturer's system, such as generating a work order if the inventory quantity falls below a pre-defined minimum.
  
• Be able to manage stock at the distributor's location. Any software that can handle a consignment inventory arrangement will be able to do this. Consignment inventory differs from VMI in that, in a consignment inventory arrangement, the manufacturer stores goods at the distributor, but doesn't issue an invoice until the goods are sold.
  
• Be Web-native, i.e., designed to run on the Worldwide Web, with any part of the system operable in Web browser mode, for example on Internet Explorer or Netscape. The system must support internal communications, most typically using XML (extensible markup language).
  
• Have an application programming interface (API) - the message format used by the program to communicate with another program - available to other software developers so that they can write the code necessary to enable the systems to share information.
  
• Be well parameterized so that the user can customize the software to match its business processes.

Planned well and supported by a flexible enterprise information management system, VMI can help middle market manufacturers and distributors build long-term collaborative relationships, streamline their operations, and use the Internet as a business tool to increase their competitiveness.

About the author:
Bill Owens is business development manager for Adonix (www.adonix.com), a developer of business application suites for the middle market headquartered in Pittsburgh, Pennsylvania. He may be contacted at 724-933-1377 or Bill.Owens@adonix.com