1. Discuss the decision criteria that should be considered when assessing the pros and cons of entering into a Vendor Managed Inventory arrangement with major suppliers?
Vendor Managed Inventory refers to the practice of optimizing the performance of a supply chain by assigning the responsibility for maintaining the necessary level of inventory to the supplier. However, this technique does not affect the transfer of ownership of the purchased goods. The model is successfully used in several industries, including retail and oil companies (Schorr, 1998).
The benefits of entering into a Vendor Managed Inventory arrangement with major suppliers are quite significant. Firstly, it gives the possibility to reduce company’s inventory and to make the processes lean. Therefore, in order to make a decision about the Vendor Managed Inventory, companies should evaluate the need and the potential gains of lean practices in their supply chain. Secondly, it is important to consider the current orientation of the company in terms of vertical integration and the strategic importance of procurement. In case supply practices contribute to the organization’s competitive advantage, they should not be outsourced to the suppliers. However, if procurement is only a support activity, forming Vendor Managed Inventory arrangements and establishing tighter bonds with suppliers may help the company to free resources for focusing on their core competencies. In this way, the company may enhance its competitiveness in the market.
Another important consideration for deciding whether to engage into Vendor Managed Inventory arrangements is the degree of business risk. As one of the key features of Vendor Managed Inventory practice is sharing risk with suppliers, the higher the risk of failure in the business or the uncertainty of the outcome, the more reasonable it is for the company to sign Vendor Managed Inventory agreements. Moreover, the higher the cost of the inputs in relation to the cost of the final product is, the more practical it is to delegate inventory management to suppliers.
2. Does a Vendor Managed Inventory system support a "lean" approach to supply chain management?
Vendor Managed Inventory allows almost ten percent inventory reduction, according to Stefan Malmsten, industrial IT manager for Eka Chemicals. The improvement in inventory level and higher reliability of supply allow companies to obtain their orders “just-in-time”, thus making supply chains more lean (Wheatley, 2008).
Moreover, lean approach to supply chain management prescribes that continuous improvement should be a part of the company strategy. If an activity does not add value sufficiently, firms should eliminate it from the overall supply chain. In the case of Vendor Managed Inventory practices, companies can lower the costs of bottlenecks and out-of-stock, as well as remove the costs associated with placing orders, loading, unloading and verifying the deliveries. In this way the company can focus on its core competencies and outsource the supporting activities to suppliers.
Finally, Vendor Managed Inventory agreements allow close cooperation with suppliers, supply chain flexibility and customized solutions for the inputs. Both suppliers and buyers work closely together to improve the efficiency of the supply chain and to make it lean as well as to develop special products or processes, which can benefit the buyers. At the same time, suppliers have higher flexibility in choosing the way to plan their processes, therefore, they can optimize their part of the supply chain by aggregating orders, long-term storage planning etc. In this way, the whole supply chain system becomes lean, not only the processes of the buyers.
3. Has globalization of supply chains encouraged or discouraged VMI?
Globalization has posed additional challenges for both buyers and suppliers. As the complexity of supply chain systems increases, it becomes more difficult for buyers to control the inputs, which come from multiple suppliers and from different geographical locations. Moreover, order placement and inventory management in the globalized environment is more complicated due to a variety of IT tools used by the vendors. Therefore, it becomes more and more efficient for the companies to outsource inventory management to their vendors, while focusing on their core activities. Hence, globalization has encouraged Vendor Managed Inventories agreements and has made them essential for maintaining competitiveness and focus.
3. Why is information technology such an important element when entering into a VMI agreement? Explain using examples from Eka Chemicals and Interfast.
The current VMI agreements prescribe nearly perfect order fulfilment by suppliers. In order to plan buyers’ inventory and to provide the necessary level of reliability, suppliers need to use IT systems to obtain real-time data about the clients’ inventory levels and to integrate this information into their planning processes. Therefore, low development of information technology significantly hampers the ability to fulfil customer orders.
The examples of Eka Chemicals and Interfast demonstrate the importance of high technological sophistication for successful VMI. In Interfast workers daily scan the bins, which need replenishment. The information in the form of electronic kanbans is then automatically uploaded to the company database triggering order fulfilment on the next day. Moreover, the obtained data may be used for customized kitting, or a customer-specific assembly of parts according to the provided bill of material, which helps to develop one-piece flow in the supply chain (Brand, 2009). Eka Chemicals installs a special data collector and transmitter, which continuously monitors customer’s processes. Using GPRS technology (CDMA in North America) the data are transferred within a few seconds to the Eka central database. The obtained information is further used for customised order generation. The use of wireless connection makes installing Eka’s VMI solution very fast and easy, thus making them attractive for the clients (Wheatley, 2008).
References
Brand, D. (2009 Sep). Supply Chain Dream Comes True. Industrial Engineer, 41(9), 52.
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Schorr, J. E. (1998). Purchasing in the 21st century: a guide to state-of-the-art techniques
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