VMI – A COMPETITIVE ADVANTAGE

VMI can provide significant savings for the supply chain over RMI in almost all scenarios capturing nearly
all benefits. VMI can be particularly beneficial for products with high demand variance or high
outsourcing cost. In the last decade, many companies have changed their supply chain structure from
retailer managed inventory (RMI) to vendor managed inventory (VMI) in which the vendor decides the
quantity to be stocked at the retail location(s).

In a true VMI setting, the supplier has the freedom to plan its own production and decide the
replenishment schedules as long as the agreed customer service levels are met. VMI is often
implemented with minimum and maximum levels for inventory and the vendor is responsible in
maintaining those. VMI shifts responsibility in decision making of the replenishment schedule and
inventory management from the customer to the supplier.

The ability to execute VMI effectively can be seen as an organizational capability, which on other hand is
a competitive advantage. A shift from RMI to VMI can involve different changes involving the
implementation of new IT systems to enable the vendor to access point-of-sale data, development of
trust between vendor and retailer, and the role of vendor’s sales force. It also requires a reconsideration
of the supply chain contracts. Analyzing and understanding how supply chain contracts perform under
VMI (and RMI) are important for retailers (online & bricks) and supply chain professionals. Some
popular coordinating supply chain contracts are as presented below:

Contract Type Remarks

Wholesale Price The retailer is charged a wholesale price per unit purchased. Unsold inventory
at the end of the season is the vendor’s responsibility and that the retailer
pays only for the goods sold.
Buyback The retailer pays the vendor price per unit purchased while the vendor agrees
to provide the retailer an agreed amount in addition to the salvage value for
each unsold unit.
Quantity Flexibility The Quantity Flexibility (QF) contract is a method for coordinating materials
and information flows in supply chains operating under rolling-horizon
planning. (the vendor charges per unit purchased but then compensates the
buyer for his losses on unsold units up to agreed Q)
Quantity Discount There are many types of quantity discount schedules; one example is an “all
unit” quantity discount contract. Two-part tariff contract is also a special case
of the quantity discount contract.
Incremental Sales Rebate The vendor has to consider the change in demand due to retailer’s sales
efforts. An incremental sales rebate given by the vendor.
Revenue Sharing The retailer pays fixed per unit purchased. In addition, the vendor is granted a
fraction of the retailer’s revenue. The retailer, in turn, keeps a fraction of his
revenue. Under the assumption that all revenue is shared, including the
salvage revenue.

To enable coordination, the supply chain resorts to contracts. In general, the goal is to write contracts
that induce coordination through appropriate provisions for information and incentives such that supply
chain performance will be optimized.

VMI Key Success Factors

Even though VMI system promises a lot, the real life implementations are not always so successful. “Out
of 10 VMI implementations, three or four achieve great benefits. Three or four have some benefits, but
not as much as anticipated, and two or three do not get any benefits”. There are four different
categories for enablers of VMI process: 1
• Relationship quality,
 • information quality,
• relevant information sharing and
• quality of communication system.

To ensure that total supply chain costs under VMI are lower than those under RMI. The inventory
quantity variation can be used to obtain different divisions of costs between the retailer and its supplier.
The potential benefit of VMI is greater when demand is more variable.

The benefits to a supply chain from two important attributes of VMI programs: shipment coordination
and stock re-balancing. Shipment scheduling in the context of VMI, the vendor is to coordinate
inventory and transportation decisions.

VMI needs changes mentally, technologically, operationally and contractually so it is not a simple
project to implement without proper preparation. This applies especially in situations where neither of
the parties involved have previous knowledge of setting up a VMI. More planning should be done on
how VMI works in digital-enabled-business relationships and how the technical aspects are handled in
such relationships.