Questions and Answers:

Question 101: As a Distributor, do I need to be able to send all of the EDI #852 fields to participate in VMI? After a few months of effort, we have only been able to validate 5 of the fields.- Kevin R., Chicago, Ill
Answer: Well, it depends. You should work with your Manufacturing partner to determine which fields they require. Not all software uses every field. (See the EDI link for the main #852 fields)

Question 102: Who "owns" the inventory in the Distributors stock- the Manufacturer or the Distributor? -Bob N, San Jose CA
Answer: In most cases, the distributor still owns the inventory. Even though the manufacturer triggers the replenishment order, the ownership remains with the distributor. Many manufacturers will work out some type of return policy if you become overstocked because of any VMI error.

Question 103: I don't think I agree with the concept of allowing a manufacturer to generate my orders. How do I know he won't overload me with inventory? - Peter C., London, England
Answer: One of the first steps in implementing VMI, is the distributors understanding of how the new stock plan is generated. The manufacturer must fully explain how it is arriving at the new stock level. The distributor must be comfortable with the plan. Most respectable manufacturers would never "overload" you because that would erode the trust between you and jeopardize the program.

Question 104: Culturally, the idea of trusting each other (Manufacturer and Distributor), has this been a show stopper more often then not? - George M., Groveland, MA
Answer: No. Its actually a selling point. Both the manufacturer and the distributor love the idea of "the power of partnership". They work together to achieve the same goal - an improved inventory plan for the distributor. If something does go wrong , most manufacturers give the distributor the option of a fairly liberal return policy. If the distributor becomes overstocked (for whatever reason) the manufacturer agrees to take the product back. One of the keys to building a trusting relationship is for the distributor to truly understand how the new stocking plan is calculated. If he does, he should never have to question why something was ordered.

Question 105: We are considering starting up a VMI program with some of our distributors.. Should we do a pilot program first?
Answer: Yes. When choosing a pilot program, I would recommend picking a customer who has alot of experience with EDI. Pilot with 2 - 3 customers who are willing to go through the learning experience with you. They must be interested in forming a true partnership. Expect a few months of confusion. But through trial and error, hopefully things will work out for the best.

Question106: What would be a good key performance indicator(s) for monitoring the VMI process?
Answer: Four of the main KPI's for monitoring the success of a VMI program are: Inventory Value, Inventory Turns
Fill Rate to the Distributor (Service Level) & Fill Rate to the Distributor's end customer.All 4 measurements should be broken down by ABC Classification if possible.
Before the VMI program begins, the distributor should have these measures in place. He should then work with the manufacturer on establishing the proper target for each measure. Once the program begins, there should be a quarterly review of these KPI's comparing the current levels to the pre-VMI levels and to the target level. It is only through this type of before & after comparison that you can get a clear picture of the success or failure of your program.
Other measurements would include: the number of Purchase Orders per month, total transportation costs, the number of items returned to the manufacturer & the costs involved (both on the manufacturer & distributors side).

Question 107: When looking at VMI solutions, should we consider an Application Service Provider?
Answer: Definitely, an ASP can offer significant advantages over the traditional model of purchasing hardware & software and managing the implementation yourself. Among the potential benefits are:

1. Faster implementation
2. Predictable costs as new trading partners are added
3. Guaranteed reliability and availability. In short, use of an ASP for VMI deserves a serious look.

For more information about ASP's , you can contact Bob Jennings of Datalliance at: info@datalliance.com

Question108: Are we ready for VMI? I manage our planning department and we are looking into the possibility of using VMI for our herb and vitamin raw materials in our manufacturing plant. We manufacture over 800 different products that are sold in the US and 35 international counties. We have over 900 different raw materials coming from 250 different suppliers around the US. Most of our raw materials are slow movers. Our lead-times vary from 2 weeks to 3 months and their shelf life ranges from 60 days to 5 years. Approximately 80% of our raw material shipments arrive to us LTL and our vendor on time delivery performance is around 85%. Our total raw material inventory is around 8 million dollars. Would you recommend fewer suppliers, reduced lead-times, and better on time delivery performance 95+% before we look at using VMI?
Answer: You are asking the right questions at the right time. Thinking about if you are ready for VMI instead of just jumping in will make it much more likely to get you the outcome you want. I would clearly recommend that you start VMI with a couple of suppliers who are at the top end. We always tell people that VMI isn't for everyone. You should focus on the 20% of suppliers that represent 80% of your requirements. There is a pretty simple reason. If you look at the benefits to be had from VMI they tend to be in percentages of business volume that is moving through the relationship. For instance, if you reduce your inventory by 25% but you only carry $100 from that supplier you have better things to do. Now if you were carrying $1,000,000 then you have accomplished something. The same goes for almost all of the savings. The costs of out of stock, the costs of ordering, the costs of recieving... Its a simple idea but you really want to look first to the suppliers that can make a difference for you.
From there, I would say the next hurdle is pick the suppliers you have a good relationship with today. That means the ones that are more capable from an execution perspective. On time shipments, correct quantities, proper billing, etc. In some ways these aren't the guys who are costing you the most today so it can be tempting to start up VMI with your worst suppliers, but resist the urge. If they don't do a good job for you today, VMI is likely to make it worse because you are more reliant on them. Stick with the suppliers you trust. I would recommend looking and seeing if any of your suppliers are in the high 90s on fill and start with those guys.
Finally, recognize that offering VMI is increasing the cost to serve your company for the supplier in the short run. Many of the benefits of VMI to the supplier(smoother demand, more visibility) won't kick in until they get substantial amounts of business flowing to them through VMI relationships. In the short run the best way to make VMI of value to the supplier is to value it in your evaluation of the relationship. So shift business to suppliers who are doing VMI. This is good for you because it builds your volume in the VMI programs where turns and service are better and administrative costs are lower. To do that you may have to go with a supplier that is a penny or two higher in price but recoginize that the total costs of doing business are lower with those suppliers. It can provide a solid reason to eliminate some of the smaller marginal suppliers and move business from suppliers who don't do a good job servicing your account. This will also encourage the suppliers who aren't doing as good a job to work to improve there business processes. In short, make sure it is a win-win for both you and the supplier.

You can contact us at VMI@VendorManagedInventory.com