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What is VMI?
Vendor Managed Inventory (VMI) is a process where the supplier or manufacturer
of a product generates orders for the distributor of that product rather than
the distributor. In order to accomplish this, there are 2 basic requirements
that must be met:
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Pre-defined product and inventory levels must be agreed upon between the
manufacturer and the distributor.
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The distributor must regularly provide distribution data (sales) back to the
vendor or manufacturer.
Based upon these 2 requirements suppliers or manufacturers can determine when
to generate an order for their distributors. Let’s use a simplified and
fictitious company, ABC Manufacturing, as an example to help illustrate this.
ABC Manufacturing only manufactures 1 product – umbrellas. They have only one
distributor, DryTime Distributors, which distributes ABC’s umbrellas to a chain
1000 retail shops. DryTime has established a policy that each shop should
always maintain between 10 and 20 umbrellas on-hand in inventory. Furthermore,
they have established that when the inventory of umbrellas for a particular
store reaches 12 or below, additional umbrellas should be ordered to bring the
inventory back up to 20.
Each day, umbrella sales data is automatically transmitted electronically from
each of the 1000 DryTime Shops to ABC Distributors. ABC Distributors receives
and processes the sales data. For any shops whose inventory has dropped to 12
or below, an order is automatically generated for that shop to bring the
inventory level back up to 20. ABC Manufacturer fills and ships those orders
thereby “managing” the stores inventory of umbrellas.
Although this is a simplistic example, it provides a straightforward view of
the basics of VMI. More specifically, the interchange of data is generally
accomplished via Electronic Data Interchange (EDI).
At the heart of this exchange are two EDI transactions. The first is a Product
Activity Report (commonly referred to as an 852). This is the sales data that
is regularly transmitted from the distributor to the manufacturer. The second
VMI transaction is used to inform the distributor of what products to expect
from the manufacturer. This can take the form of one of two EDI transactions. A
commonly used transaction is the purchase order acknowledgment, referred to as
the 855. Some distributors use an advance ship notice (ASN or 856)
which alerts the distributor of both the order and shipment. For the purposes
of VMI, either document works fine if properly implemented as a means of
notification to the distributor.
Many benefits arise from VMI. With VMI relationships in place, both
manufacturer and distributor inventory levels are lowered. These lowered
inventory levels are a direct result of better forecasting capabilities. The
manufacturer can now match the demand for product and tune production to match
cyclical or seasonal variations. Administrative costs are lower for both
distributor and manufacturer as less time is spent on manual ordering and
fulfillment processes. With VMI, both the manufacturers and distributors shift
their focus from the mundane issues to the central issue: selling more products
more efficiently.
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