1. Summary of my thesis in Vendor Managed Inventory
Supply Chain Management is an important and well-studied area. Especially inventory control within the supply chain is in great focus these days, since inventories can often be a financial burden. Thus, efficient control of inventories may lead to great savings. One way to control the inventories is to let the vendor make the decisions concerning the retailer’s inventory. This inventory model is called Vendor Managed Inventory (VMI). VMI shifts the responsibility of the retailer’s inventory from the retailer to the vendor. The vendor gets full information from the retailer and then makes the decisions on how much is needed to fill up the retailer’s inventory. For this cooperation between the vendor and the retailer to work properly and prove truly beneficial, both partners need to have the right assumptions from the beginning. It is important that the cooperation is built upon trust between the partners. When the VMI is successfully implemented and built upon the right assumptions, then the partners may gain the following benefits:
- The vendor’s benefits: If the vendor is able to fully understand and use the information provided by the retailer, it will lead to better production planning. For this to happen, the vendor must be able to make a correct forecast for the retailer’s products, based on the information he receives. If the vendor manages to do so, he will gain better order, production, replenishment and transportation planning, thereby eliminating the need for extra capacity and large inventories. The VMI also gives the vendor a competitive advantage, because he can make sure that his product is never sold-out at the retailer.
- The retailer’s benefits: With the vendor managing the inventory, the retailer will spend less time monitoring the inventory. The retailer can then use the time formerly spent on ordering and meeting deadlines on more important activities. Depending on how the VMI contract is designed, the retailer can also save on inventory costs, and possibly also storage fees, since the inventory is now effectively controlled.
However, implementing VMI also has its disadvantages. For example, the vendor gets a higher operating cost, because he now has new activities regarding control of the retailer’s inventory. Other disadvantages of the VMI-system could be; large investments due to the implementation of VMI, a lack of security in the technology provided be the vendor, an inability on the vendor’s behalf to read the retailer’s information and use them correctly for forecasting, a possible change in capacity, which may be costly for the vendor, and, for the retailer, a loss of responsibilities and flexibility regarding the inventory. Also, if the contract is somewhat confusing and does not clearly show both partners the benefits of the system, the VMI may fail. Therefore, not all companies implement VMI.
To ensure that the VMI system gets a good start and both partners get a say in the cooperation, a contract can be drawn up. A contract may include many parameters and can motivate both partners to cooperate and strive for better results. Especially contracts with holding cost subsidies are interesting; because such contracts divide the retailer’s holding costs between the partners. This type of contract proves useful in situations, where the retailer has many other competing products and the vendor pays for storing his product. Further, it also ensures that the vendor does not overfill the retailer’s inventory. In the article ”Contracting Under Vendor Managed Inventory Systems Using Holding Cost Subsidies” (2008), M. Nagarajan and S. Rajagopalan show that designing a VMI system, where the retailer charges the vendor a rent per unit, proves more cost efficient for both partners than the use of the retailer managed inventory (RMI). The purpose of such a contact is to design it so that both partners can see the benefits, both practical and financial, of the VMI system, when compared to the RMI system.
Another reason for choosing VMI is that it can help companies reduce the Bullwhip effect. The Bullwhip effect concerns the variations of order information for the upstream companies in a supply chain. With full information sharing, VMI reduces the variations in the order within the companies in the VMI system. VMI is normally implemented by two companies, and not a whole supply chain, but the Bullwhip effect is still reduced in the whole supply chain and reduces the cost connected to the Bullwhip effect. By using a simulation model, companies can test if VMI can reduce the Bullwhip effect, and check out the VMI system, before investing in it. Thus, VMI may prove useful in reducing the Bullwhip effect, because of the visibility of information between the retailer and the vendor.
After studying how VMI can ensure partnerships with contracts and how it can reduce the bullwhip effect, I contacted Nomeco, the leading supplier of the medical industry in Denmark. They agreed to let me interview them and see the VMI-system used in real life. This first-hand experience allowed me to see how much you can change the VMI-system and design it to fit each company’s individual needs. For example, Nomeco has a huge and very impressive VMI-system, which controls the price and inventory levels at the pharmacies every fourteenth day. This is necessary, since the law requires that prices change every fourteenth day. At Fredericia pharmacy, I got to experience the VMI-system from the retailers view. They were very satisfied with the system, and said VMI has given them more time for their customers. These two real-life experiences with the VMI system have proved to be invaluable for my research.
After reading, studying and learning about the VMI, I have found that it is a good model, which may benefit companies greatly depending, of course, on the situation the companies are in. It is essential that companies create a well-formulated contract with all the necessary information, demands and needs from both partners. Also, they have to agree to a possible rent paid to the retailer. In real life, this may be difficult to achieve, and thus some companies decide to end the cooperation before it has even begun. Yet, great benefits are in store, if both partners get their needs and demands in the VMI contract.