Vendor managed inventory systems have enjoyed something of a good press of late; after all if it is good enough for major companies such as Walmart, in the US then surely it is without parallel and is the inventory system that all companies should use.
However, there are disadvantages to the vendor managed inventory system. The fact is that no inventory system is perfect, there are lots of advantages and disadvantages according to the type of business that is being run.
Vendor managed inventory systems are simple. The supplier monitors how much stock the buyer has, then the supplier decides how much stock to send the customer, when it will be shipped, what type of stock etc.
This can often mean that there are fewer ‘stock outs’ and that the costs of stock are kept low, because the vendor (seller) effectively controls stock levels. So why isn’t it used absolutely everywhere if it is such a good system and relieves the customer of all the hassle of managing stock levels.
Size of the Buying organization and consumption rates
This may sound glib, but it is true. Take retail for example – if you have thousands of shops and significant buying power suppliers may be able to justify the management cost against the potential reward where the customer is considerably smaller suppliers may be less willing to risk the financial cost against the likely payback.
Trust Is Hard To Earn
When everything goes well within the supply chain, there is no problem with vendor managed inventory systems, but to establish a really trusting relationship takes time. Switching over to VMI does require a certain level of trust on behalf of all parties for example
a) Will the supplier deliver as appropriate
b) Will the customer consume as expected
c) Have the right products been selected
Many organizations start small, with only a certain range of products, this builds trust, which means that in the early days of the VMI, rewards maybe smaller but the process is de-risked. allowing VMI time to ‘bed in’ and to work out. Its important that you consider this upfront in order that your implementation doesn’t take overly long!!
Reliant On Technology
Where your VMI is heavily dependent on technology this can attract 2 main disadvantages; cost and reliability.
The technology to implement VMI can be costly for small organizations stock levels are required to be routinely monitored, in order for the supplier to process restock trigger messages.
Then there is the issue of reliability. Most technology is now reliable, but there can be times when it fails and this is when the VMI system will effectively go into meltdown, often as a result of inaccurate stock level data.
Note that VMI doesn’t explicitly demand technology to operate – many organizations deploy VMI through managed stores where suppliers visit to verify and top-up stock levels.
VMI requires all the stakeholders involved to be willing to implement the system, but what can happen in practice is that some stakeholders at least, feel that VMI was imposed on them and then they are less likely to work with the system positively. Then if there is a stock out or some other glitch in performance, those alienated stakeholders will feel their reservations were vindicated.
So it is a system that depends on 100% support from stakeholders and this is often incredibly difficult to achieve.
VMI can offer some tremendous benefits but as with any initiative careful planning and consideration is required!
- 10 Problems With Vendor Managed Inventory
- 10 Ways To Improve Supply Chain Inventory Management
- Introduction to Kanban and Pull systems
- What Is A Fixed Order Point?
- How to carry out an ABC analysis of inventory