Vendor Managed Inventory (VMI) has at present gained the power and support to deliver its ‘true’ promise. Though its adoption continues to grow while posing new challenges, VMI is likely to diffuse to a new set of industries triggering the need for multi-vendor management and cross-vendor cooperation.
Well, it is no more a concern to ensure adequate inventory or minimize stock-out situations, in their own locations. Now, the inventory manager is the vendor himself. Globally, firms have recognized the importance of efficiently managing their response to customers (so-called ‘efficient customer response (ECR)’). This notion has forced several manufacturers and retailers insist on their immediate suppliers to, assume the responsibility of managing inventory and execution of purchase orders on their behalf. Vendors too are displaying keen interest to assume such responsibility as they find it a better way to either insure or optimize their sales. This philosophy of B2B relationships to realize mutual benefits has placed the vendor in the new role leading to the concept of ‘vendor-managed inventory (VMI).’ However, there are several concerns both current and emerging, which pose a great challenge to the parties involved in VMI. Addressing those concerns should take an institutional approach as delved in the ensuing discussion.
Vendor’s Resilience Matters
A major concern that is very
often questioned in VMI context is, the vendor’s resilience. When firms
encounter mammoth increases in demand for their end products, the chances that
their suppliers can replenish inventory matching the required levels, are
usually low. Vendors can be resilient upto their own maximum capacity to which
they can serve. However, once the demand level goes up beyond vendor’s maximum
potential, right replenishment of customer’s inventory can’t be guaranteed.
Service Disruptions Will be There
Though vendors can replenish
their customers’ inventory for any level of variability in demand, ensuring
timely replenishment at times of trouble can be a major challenge to the
vendors. Every time, when emergency situations arise due to unexpected
disasters, keeping up the vendor promise is not practical. System and network
outages for extended periods can also make the vendors completely handicapped,
taking the inventory management into chaos. When conventional or manual systems
are leveraged for data sharing, very often, they result in distorted
information that leads to mis-communication, ultimately making mess of
customer’s inventory management.
Should Marry Culturally too
Finding the right ‘fit’ between
vendor and customer firms is a very rare thing. Value systems, technology
maturity, employee mind-set, service-orientation, performance standards, etc.,
may vary across both organizations. These cultural differences, pose a greater
challenge in achieving seamless integration between both parties. Very often,
this factor turns out as a major hurdle while executing VMI process.
Impediments in the Way…
‘Information exchange’ is one
of the crucial requirements to facilitate collaboration between both parties of
VMI practice. Usually, the data with regards to inventory, point of sales (PoS)
or demand and sales promotion calendar is provided to the vendor for making
timely replenishment decisions. When electronic medium is leveraged for data
transfer, data sources and systems of both parties should be seamlessly
integrated. However, achieving ‘interoperability’ while linking vendor and
customer’s systems is one of the major challenges for successful implementation
of VMI. Since data sources and applications are divergent operating on
different platforms, ensuring compatibility of such technology integration is a
serious issue. As new and sophisticated technologies emerge, or when internal
systems are upgraded, convincing the other party of the VMI relationships to
upgrade technology is extremely hard.
Information integration is
though quite complex and not so a easy task, gaining ‘trust’ between both
parties of the VMI is even a greater challenge. Sharing critical information
such as demand or PoS data and sales promotion calendar with the vendor is
based on the level of confidence and trust that exists between both parties.
On the other hand, personnel of
both parties display reluctance to change. In view of the threat of loss of
employment, sales force of vendor and buyers or inventory managers of customer
organization, resist the move towards VMI adoption. Overcoming this barrier is highly crucial for
successful implementation. But, gaining the employees support is not possible
without a meticulous employee-benefit program. Very often, such high-level
resistance from employees can have a serious impact on the part of VMI
implementation team to address the cultural changes required. Both parties
should, therefore, explore reliable change management options to overcome employee
resistance.
Continuous trend of
globalization is leading to the practice of ‘strategic sourcing’ by customers.
This will question the viability of managing customer’s inventory, while
offering products at a competitive or discounted price.
Bottlenecks Ahead
The ongoing trend of
globalization, emergence of extended supply chains, increasing threats and
regulations in distribution, and current trends in retail businesses are likely
to add few more challenges, predominantly to the vendors and manufacturers. The
following are ‘may-be’ concerns that will emerge.
1. Extended supply chain
environment is adding new stakeholders like contract manufacturers (CMs) in
between vendor and OEMs. This will increase the complexity and distribution
costs for the vendor, and creates the need to make changes in their
replenishment policies and contracts. Besides, access to inventory data from
multiple sources to gain a consolidated view is not so easy task for both VMI
parties.
2. Vendors will have to comply
with the emerging transportation and distribution regulations in the process of
executing replenishment plan, particularly in case of pharma and biotech
industries.
3. Similarly, the emerging
distribution challenges such as cross-border terrorism or bio-terrorism, etc.,
should be effectively managed, particularly by the manufacturers when
replenishing inventory at distributor or retailer’s location.
4. Retail industry consolidation
and the ongoing power-shift from manufacturers to retailers may throw several
challenges. One significant challenge could be managing the threat of increased
demand for additional services from the ‘big-box’ retailers.
5. Another significant trend in
retailing is the emergence of network of multiple retail outlets distributed
geographically. As retailer’s operations grow and spread across geography,
managing and replenishing ‘islands of inventory’ becomes more complex and
challenging.
6. With increasing cost of working
capital, vendors may find it difficult to replenish the demanded inventory
beyond certain level at customers’ place, at promised rate.
7. As demand variability
increases, vendors should make necessary preparations to replenish customer’s
inventory, ‘on-demand’. To ensure on-demand inventory replenishment, suppliers
should set up distribution centers (DC) or warehouses at customer’s proximity,
which may increase the operating costs of the vendor.
Govern ‘Board of Vendors’
Instituting VMI practice across
all suppliers is a herculean task.
Particularly, manufacturers find it very hard to convince all
part/component vendors to offer the vendor-managed inventory services. In the
absence of such multi-vendor managed inventory, it turns out to be very hard on
the part of manufacturer to ensure absolute ‘synch’ of inventory across all
parts/components. On the other hand, governing cross-vendor relationships
emerges as a great challenge as multiple vendors agree for offering inventory
management services. This leads to the other challenge i.e., managing
synchronization of ‘inventory replenishment’ across all parts suppliers.
Manage Cross-Vendor Partnerships
When same parts are sourced
from multiple vendors, what is the chance that all suppliers offer
vendor-managed inventory services? Infact, it becomes a tough deal to convince
every one on the board. Even if everything goes well, ensuring accuracy of
replenishment decisions made by each supplier, in isolation, is hard unless
cross-vendor cooperation and seamless visibility into the customer’s inventory
are instituted. However, on the other hand, cultural differences and lack of
process or technology standardization across vendors may strongly affect
continuity of operations.
With
advancements in data collection and integration technologies, there will be breakthrough
improvements in VMI potential. A seamless integration is possible now that can
promise real-time visibility into how products are selling, giving the
on-demand and accurate replenishment capabilities. On the other hand, the move
towards seamless e-business integration and increased adoption of B2B
collaboration, are likely to create a congenial environment for the VMI to
flourish. As a result of these, vendors and manufacturers are empowered further
to reap the true benefits of VMI.
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