DRP Terms

In VMI a manufacturer or distributor assumes the role of inventory planning for the customer. Extensive information sharing is required so that the manufacturer/distributor can maintain a high degree of visibility of its goods at the customer’s location. Instead of the customer reordering when its supply has been exhausted, the supplier is responsible for replenishing and stocking the customer at appropriate levels. Wal-Mart has mastered VMI and is the company against which many other organizations benchmark themselves (1).

Steps in a VMI process
For better understanding they describe the VMI business model as follows:
- The manufacturer receives electronic data (usually via EDI or the internet) that informs him about the distributor’s sales and stock levels.
- The manufacturer can view every item carried by the distributor and point of sales data.
- The manufacturer is responsible for creating and maintaining the inventory plan.
- The manufacturer generates the order, not the distributor (But this doesn’t change the ownership!)

Customer Benefits
When the supplier can see that its customer is about to exhaust its inventory, the supplier can better prepare to replenish the customer because the supplier can then better schedule its own production/distribution. Customers will reduce/eliminate stockouts because they will not have to reorder goods at the last minute without knowing whether the supplier has the ability to restock without interrupting the customer’s operations. Therefore, part of VMI’s goal is to reduce uncertainty that arises when the supplier is blind to the customer’s inventory status.

Supplier Benefits
As long as the supplier carries out its task of maintaining predetermined inventory and avoiding stockouts, it will be able to lock in a VMI-supported customer for the long term with or without a contract. This will produce a steady and predictable flow of income for the supplier and reduce the risk that the customer will switch suppliers (Switching would be too costly for the customer). A VMI arrangement will allow the supplier to schedule its operations more productively because it is now monitoring its customer’s inventory on a regular basis. Furthermore, reductions in inventory will be achieved once the supplier develops a better understanding of how the customer uses its goods over the course of a year.

Consignment Inventory is inventory that is in the possession of the customer, but is still owned by the supplier. In other words, the supplier places some inventory at the customer’s location. The customer purchases the inventory only after he has resold or consumed it. The liability of loss, damage, obsolescence and theft remains with the supplier.

As a manufacturer you may have consignment inventory at your customers and you may also have to contend with consignments from your Vendors. Most ERP systems have difficulty with consignment inventory. With consignment inventory the invoicing is not tied to the shipment or receipt transaction. This requires companies to manage consignment inventory with cumbersome time consuming and error prone processes. Typically both the Customer and Vendor maintaining separate spreadsheets. There are several trigger points to the actual ownership transfer and billing transaction:

Collaborative Planning, Forecasting & Replenishment (CPFR)

I1) A collaboration process whereby supply chain trading partners can jointly plan key supply
chain activities from production and delivery of raw materials to production and delivery of final products to end customers. Collaboration encompasses business planning, sales forecasting, and all operations required to replenish raw materials and finished goods.

2) A process philosophy for facilitating collaborative communications. CPFR is considered a standard, endorsed by the Voluntary Inter industry Commerce”.

Due to inaccurate forecasting many distribution companies encounter difficulty in managing their finished
goods inventories. The result of these inaccurate forecasts is surplus inventory on items that did not sell &
backorders on items where actual sales exceeded the forecasts. These forecasts inaccuracies inevitably
result in higher costs for the distributor & the ultimate consumer. Voluntary Inter Industry Commerce
Standards (VICS) is a trade association for retailers & members of their supply chains. The CPFR
initiative involves a major reengineering of existing forecast & related planning & replenishment processes.

Manufacturers found themselves planning with one set of numbers while retailers have a different set of
numbers. Because of this the customer service is impacted at the shelf level. The CPFR initiative
addresses business processes that must be jointly managed, standards for sharing information, methods
of integrating the results of collaborative effort into the operation system & key performance