A new approach to VMI

In a recent article in Supply Chain Digest, Malcolm Buxton (President & CEO, JustEnough Software), shares his thoughts on Vendor Managed Inventory and states that “retailers and suppliers that level out their responsibilities for merchandise management and replenishment will reap the rewards”.

Cooperation is critical for today’s retailers and suppliers, and sharing key insights into consumer preferences and buying behaviors can drive sales, improve margins and increase customer satisfaction. It can also help streamlining the supply chain, improving availability and reducing costs. Reacting to (ever-changing) consumer demand is a must but also rewarding if done well. Retailers and their suppliers should work together to ensure the rapid and accurate exchange of information, share the planning burden and make satisfying today’s consumers a common goal.

Problems and risks with VMI

Vendor Managed Inventory (VMI) is one approach to ensuring efficient supply chain management. Through VMI, retailers provide their supplier partners with information – whether it’s point-of-sale (POS) or customer loyalty data – to help them determine how best to manage and replenish merchandise at the store or warehouse level. Forecasting and ordering activities are handled by the vendor – not by the retailer, as it is in a more conventional process. Although VMI programs support efforts to become more consumer centric while improving production planning and reducing inventory costs and stock levels, there may be drawbacks.

Most notably, suppliers are solely responsible for managing inventory and deciding how much to replenish and when. In some models, the product must go through the POS system before the retailer incurs any costs. Another challenge resides in the act of sharing information. Research shows that retailers often hedge on giving their suppliers access to store-level consumer data(1), which can negatively impact a supplier’s ability to accurately plan.

But letting suppliers completely control the ordering process can backfire on retailers. If products on their shelves aren’t selling, retailers may pay the price with unnecessary markdowns and promotions. Or, they may give up valuable shelf space that could have been allocated to better-selling brands. Conversely, if out-of-stock problems arise, retailers run the risk of lost sales and customer dissatisfaction within the overall category.

The VAIM approach

To address the challenges associated with traditional VMI, companies may consider adopting a new approach to managing and replenishing merchandise. Some leading-edge retailers are taking back control over the ordering process. In this new hybrid model, termed Vendor Assisted Inventory Management (VAIM), the supplier continues to leverage data from the retailer to determine and shape demand for products at the store level. However, retailers play an active role in determining what the product ranges and mixes should be on their store shelves instead of leaving those decisions solely to their suppliers.

A leading discount apparel retailer adopted a VAIM approach with all of its suppliers – except for one that was in a VMI agreement with the retailer. After evaluating the results over several seasons the retailer realized that its sales and stock turns were significantly higher for the VAIM products compared to those ordered through the VMI program.

Companies that adopt a VAIM approach benefit from a checks-and-balances approach to collaboration. Although the supplier still has visibility into data that can help streamline supply chain efficiencies, retailers can be assured that valuable shelf space is filled with products that will meet consumer expectations. Doing so will lead to higher sales and diminishing markdowns, creating a win-win scenario for both the retailer and supplier.

SCDigest and JustEnough Software

Malcolm Buxton is president and Chief Executive Officer of JustEnough Software. With more than 30 years of experience, Buxton has helped JustEnough bring to market a new generation of technology that solves the analytical, planning and execution challenges of today’s retailers, brand owners and consumer packaged goods companies. Visit their website: www.justenough.com.

Read the full article in SCDigest.