Vendor-managed inventory in the retail supply chain

Vendor-managed inventory (VMI) is one of the most widely discussed partnering initiatives for improving multi-firm supply chain efficiency. Also known as continuous replenishment or supplier-managed inventory, it was popularized in the late 1980s by Wal-Mart and Procter & Gamble. VMI became one of the key programs in the grocery industry’s pursuit of “efficient consumer response” and the garment industry’s “quick response.” i Successful VMI initiatives have been trumpeted by other companies in the United States, including Campbell Soup and Johnson & Johnson, and by European firms such as Barilla, the pasta manufacturer.

In a VMI partnership, the supplier, usually the manufacturer but sometimes a reseller or distributor, makes the main inventory replenishment decisions for the consuming organization. This means the vendor monitors the buyer’s inventory levels (physically or via electronic messaging) and makes periodic resupply decisions regarding order quantities, shipping, and timing. Transactions customarily initiated by the buyer (such as purchase orders) are initiated by the supplier. Indeed, the purchase order acknowledgment from the vendor may be the first indication that a transaction is taking place; an advance shipping notice informs the buyer of materials in-transit.

In this relationship, buyers relinquish control of key resupply decisions and sometimes even transfer financial responsibility for the inventory to the supplier (whether by the letter or spirit of their agreement). The arrangement transfers the burden of asset management from the consuming organization to the vendor, who may be obliged to meet a specific customer service goal (usually some sort of in-stock target).

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