Vendor-managed inventories are a growing trend in supply chain management. The supplier manages the buyer’s stock, which improves business for both.Sometimes it’s necessary for companies to re-invent the way they do business in order to achieve a desired result. Collaboration in supply chain management is a case in point. A growing number of enterprises are working not only within the four walls of their organisations, but also with external suppliers, channel partners, contract manufacturers and others. With the help of IT-based integration, partnership along the supply chain is proving to be a win-win situation, permanently changing the way buyers and suppliers do business.
“Supply chain collaboration is clearly an area in which the Internet is enabling gains that were not previously possible, and the surface has still only been scratched,” says Jon Ekoniak, a senior research analyst with the Web publication The B2B Analyst. “Optimised production, collaborative demand forecasting and reduced inventory are among the many benefits that enterprises are hungry to realise.”
One of the leading examples of supply chain collaboration is vendor-managed inventory, or VMI. In VMI, the normal trading relationship is reversed. Instead of customers managing their own stock and deciding when and how much more to buy, the supplier does it. According to Alain Saipe, managing director at KPMG Consulting LP in Canada, VMI has produced remarkable results; sales, service and profitability are improved by turning the tables on which trading partner does the planning.
“It saves time and expense for the customer because the supplier is doing much of the supply planning work,” says Saipe. “It can improve speed of delivery if it is done jointly with a supply chain performance improvement programme, which it often is.”
KPMG surveyed a cross-section of large Canadian companies at all stages of their supply chain and found that more than 75 percent were keenly interested in VMI. Saipe estimates that perhaps 10 percent of all companies worldwide use VMI, with particularly strong interest in Europe, the United States and the Asia-Pacific region.
The current explosion of interest in VMI is occurring because three important ingredients – motive, models and means – have come together to stimulate change, Saipe says. The motive for VMI is better business results, and, Saipe adds, “the case experience is undeniable. Many supply chains are working much better under VMI than they did before.”
The gains are made in three ways: First, retail sales increase when a more effective supply chain reduces or eliminates store out-of-stocks. Suppliers’ sales can increase sharply when the customer and supplier enter into a preferred trading relationship. Second, inventory can fall and other supply chain costs can come down when the trading partners shorten cycle times, revise ordering practices and automate and simplify the planning, ordering and fulfilment processes. Third, manufacturing costs can fall when the supplier is able to optimise production plans by integrating the more timely and complete sales information that is received.

Several alternatives
There are numerous models of VMI partnerships; a strong example is the arrangements between the global retailer Wal-Mart and some of its suppliers – for example, Proctor & Gamble and Rubbermaid. P&G started managing diaper inventory for Wal-Mart almost 10 years ago, says Saipe. The arrangement began as a way for the two large trading partners to help each other do business. Other successful examples include Fasson MPD, a division of Avery-Dennison, and Worsleys, the only inter-merchant paper trader in the UK, and the pharmaceutical company Baxter International and a large number of hospital customers in North America.
The obstacles to a successful VMI programme are usually either strategic or operational, says Saipe. At the strategic level, a high-level decision must be made about how the company wants to position itself. The company needs to gain the support of its employees and recognise that there are benefits to stronger supply chain cooperation.
“Strategic obstacles are the concerns most often expressed at the distributor level, that it’s ‘not in their best interest’ to share information back up the supply chain,” says Saipe. “We think this is a poor argument in most situations. In fact, the distributors that will prosper in the coming years are the ones that will give the most value to customers and suppliers. The pipelines that will be most attuned to the consumer’s needs are those that have a cooperative demand chain focus on the consumer.”

Understanding essential
A major change of company operations requires a cultural adjustment as well as significant re-organisation of everyday job duties, he adds.
“Culturally, many companies have not yet recognised the importance of the supply chain.
For years, the focus has been on pushing product farther down the supply chain and negotiating the most money out of each transaction. The new culture must acknowledge that the consumer has the ultimate power, that the supply chain itself is a competitive tool, and that cooperation between trading partners is essential.”
Saipe points out that VMI programmes are not necessarily intended to last forever; they are intended to achieve goals set up when the programme is put in place.
“Vendor-managed inventory is not a panacea, but an important method for driving down costs,” agrees John J. Keough, editor-in-chief of the US trade publication Industrial Distribution.
In summary, says Saipe, “Processes like VMI are helping trading partners move to new levels of supply chain performance. The three things that must be in place for success are a solid business case that produces tangible benefits for both partners, an open and cooperative relationship built on mutual trust, and real support and commitment from leadership in both companies.”

Amy Brown
a business journalist based in Stockholm