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.
Willing Stakeholders?
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!
Supplier Relationship Management is a toolset designed for managing the relationship with your suppliers on a collaborative basis to ensure that the relationship is as constructive and indeed productive as possible.
However, it is important to view this as a strategic management tool that needs to be implemented in a structured fashion. It is not simply about ‘cosying up’ to the supplier; it is about a relationship that is fruitful and mutually beneficial.
It is therefore important to adopt a strategic approach to this relationship and to establish a framework for managing the relationship encompassing all the different aspects of the relationship. SRM depends on each supplier having a tailor made relationship with the customer. It may take time to establish an effective SRM, but the rewards can be significant and long lasting.
Typical aspects that are managed as part of the relationship are:
Value:
Value is integral to the supplier relationship, primarily because the whole relationship is based on the value added by the supplier. This might be in the form of price, product or service levels. Value needs to be a central concept within the supplier relationship.
Communication:
Communication is perhaps the key aspect of any supplier relationship. Various SRM technological tools are on the market to assist with implementing the relationship and SRM technology is developing quickly, which will offer even greater choice. However whatever the delivery mechanism exchanging information should be carried out in a clear and concise way.
Segmentation of Suppliers:
There is no single supply chain within any company so the supply chain has to be broken down into different segments. This ensures that the specific relationship with a supplier is appropriate in terms of what is being supplied. To bring it down to simplistic levels, you will want to manage suppliers who provide your cleaning products, differently from a supplier who equips you with 50% of your raw materials.
Resources:
There are different resources that are needed to ensure successful relationships are formed. Resources tend to be focused on the key personnel who need to work on a collaborative basis to establish SRM. These personnel need to have knowledge of the market, the risks that are involved and expertise within the commercial arena.
Accountability:
Akin to resources is the concept of accountability which requires senior management to take control of SRM and to be accountable for the process being successfully implemented; without this accountability there is a danger that the strategy can be allowed to wither and die. Few businesses have staff who only deal with SRM. It is usually something that someone does in addition to their other duties, which means that it is often regarded as a ‘bolt on’ to their jobs. So it needs a driving force behind it and accountability will act as that driving force.
Governance:
Governance is the framework for implementing SRM and is important with regard to ensuring that different segments of the supply chain are subject to different means of governance. It is not suitable to use one style of governance with different suppliers. So this has to be given some time and attention and at least initially, it can feel time consuming, but it is worth the effort in order to ensure the best governance for each segment.
Risks and Challenges
Inherent to any SRM are the natural risks and challenges that exist when customers have suppliers. These can never be completely eliminated and should always be acknowledged rather than being swept under the carpet. If there were no risks and no challenges with regard to SRM, it is possible that the process would be of little worth, but this is a way to manage those risks!