An example of the benefits of using VMI technology is Supply Chain Management

An example of the benefits of using VMI technology

Datalliance investigated during 2005-2006. advantages of using VMI technology among US distributors. The supply chains of 21 large distributors of the USA, working with 10 suppliers of FMCG goods, were surveyed. At the same time, the total number of warehouses in the network structure of their supply chains was 156.

On average, the positive results achieved between distributors and their suppliers when using VMI technology were:

• by 24% - sales in each warehouse increased;

• by 25% - increased inventory turnover of distributors;

• by 31% - the deficit of stocks on the shelves (out of stock) has decreased;

• by 54% - both the turnover of warehouse stocks and the level of customer service have increased.

In its simplest form, the VMI implementation model, the "producer-distributor-consumer" consists of the following steps (Figure 7.9).

A simple model for implementing VMI technology in distribution

Fig. 7.9. A simple model for implementing VMI technology in distribution

Step 1. The consumer (retailer) sends the distributor information about the products sold by him. This information can be obtained with the help of barcode reader technology and transferred to the distributor via EDI or via the Internet.

Step 2. The distributor processes the information and passes the confirmation to the consumer, indicating in it the quantity and characteristics of the products to be delivered, the date and place of delivery, and then sends the goods.

Step 3. The distributor collects data for all customer orders that he consolidates and sends to manufacturers daily via EDI or via the Internet.

Step 4. The manufacturer replenishes the distributor's stocks.

Step 5. The distributor sends invoices to the consumer who makes payments on their basis.

Step 6./6. The consumer (distributor) makes payment for replenishment of stocks.

Using VMI technology can give both a very good and a bad result. Much depends on the initial conditions in which the system is applied. In failures, it's customary to blame the shortcomings of technology, and not some own shortcomings. In order for VMI technology to work successfully, it is necessary to establish not only a set of agreements, but also a different level of relations, oriented toward mutually beneficial cooperation in the supply chain.

As noted earlier, within the framework of the VMI-agreement, different allocation of stocks can be stipulated. Some customers require placing stocks in close proximity to their capacity, but on the territory of the supplier or operator. A variant of work on JIT technology is possible. When deciding whether to place stocks, you need to compare the total costs of each option.

In general, there are four stages in the implementation of VMI technology in distribution, which are usually carried out within the framework of the CPFR program (see paragraph 7.4).

Stage 1: preparation. Negotiations, the formation of project teams, the application of the CPFR program, minimization of stocks, focusing on processes adding value, eliminating bottlenecks.

Step 2: Prior to implementation. Continued use of the CPFR program, calculation of sales forecasts, costs, insurance stocks, lead times, service levels and other KPI supply and logistics.

Stage 3: Implementing VMI. Implementing VMI technology on the basis of a signed contract.

Step 4: Adjustment. Modify the parameters and inventory management processes that have been identified during the VMI implementation.

The content of VMI technology in the industry has its own characteristics, which are as follows:

• the agreements between the supplier and the product manufacturer are based on the ideology of the DRM;

• the supplier maintains inventory from the consumer based on predefined agreements with the manufacturer for the minimum/maximum inventory levels of the MP;

• If the inventory level MR (in the short term) becomes too low in view of the anticipated demand for the final product, the supplier re-plans and adjusts the supply.

In Fig. 7.10 shows the general scheme for implementing VMI technology for an industrial enterprise [26].

From the scheme it follows that there are three levels of material and information flows that ensure the integration of the supplier with the GP:

• information flows at the level of strategic and tactical initiative (VMI contract);

• information flows supported by the CIS of the manufacturer of the product and the supplier at the level of the back office;

• MP flows from vendor to manufacturer.

Quantitative and qualitative composition of information exchange between the parties of VMI program in industry is much more extensive than in trade.

Scheme for implementing VMI technology in industry

Fig. 7.10. Scheme of implementation of VMI technology in industry

The manufacturer sends the current information to the supplier:

• about the gross demand for critical components for the planning horizon in the context of supplier responsibility;

• about the available MP inventory in their warehouses;

• about the dynamics of stock levels, the composition of the specifications (POM), the main production schedule (MPS).

The vendor sends the current information to the manufacturer:

• about stocks in transit (shipping documents);

• about shipments for scheduled deliveries (quantity, dates).

Both partners must at the same time provide:

• transparency of information about demand within the boundaries of their supply chains;

• exchange of messages about critical situations;

• The specified nomenclature of MR reserves.

The VMI program can be used as a competitive advantage when negotiating with new applicants for the role of dealers or service centers. At the strategic level, it is important to choose the right partner for such a program, as the result should be mutually beneficial cooperation. Despite the fact that VMI technology can bring many benefits, it should be used only if it is in fact justified and satisfies the requirements and expectations of all parties.

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