Report on Vendor Management Inventory

Submitted To:
Dr. Masood Sabzwari

Submitted By:
Sara Ahmed – Reg # 12303
Mamoona Badar – Reg # 12815

Date: 24-12-2010
Day: Saturday 09:00 am – 12:00 pm
MBA (Morning)
 Acknowledgement

Letter of Acknowledgement.

September 24th, 2011

It has been a pleasure to be Dr. Masood Subzwari's students. We would like to thank
him for giving us the chance to do this report as a team work.

His lectures have been very interesting and motivating. We are extremely grateful to
him and appreciate his efforts for providing us full support, encouragement and
valuable guidance.

Sincere regards,

Sara Ahmed
Mamoona Badar
Vendor Management
Introduction

Vendor Management is a structured approach of receiving the best service and value from a
supplier. The core of such a program is the establishment of an ongoing communication channel
with a vendor.

Vendor Management ensures that a vendor will continue to provide quality goods and services at
agreed upon pricing, throughout the term of a written agreement. It also creates the appropriate
forum to proactively address changes in business needs as they arise.

The individual, function, department or college authorizing and requesting supplies or services from
a vendor is required to appoint an Agreement Administrator or individual responsible to oversee the
work to be performed by the vendor for the specified contract or agreement.

VENDOR:

A vendor, or a supplier, is a supply chain management term meaning anyone who provides goods or
services to a company. A vendor often manufactures inventorial items, and sells those items to a
customer.

VENDOR MANAGEMENT:
It is just as important to communicate with your suppliers and vendors as it is to communicate with
your customers. Establishing the proper communication channels and information flows between
you and your suppliers can lead to increased efficiencies, reduced costs and better customer service.
This section will cover the simple communication methods (i.e. telephone) and other ideas that will
allow your company to build a win-win relationship with your suppliers and vendors.

GOALS:

These goals are:

 Establishing Goals- Just as employees need clearly established goals, operations need clearly defined
performance parameters. When selecting or managing vendors, vendor managers must optimize their
opportunity to achieve these goals by using third parties companies.
 Selecting Vendors- The fine art of vendor management is essential to optimizing operational results.
Different vendors have different strengths and weaknesses, and it is the vendor manager’s
 responsibility to match the right company with the desired performance characteristics. Failure to
consider this comprehensively could lead to complete failure.
 Managing Vendors- On a daily basis, vendor managers must monitor performance, provide feedback,
champion new projects, define or approve/disapprove change control processes, and develop vendors.
There’s a tremendous amount of detail to this aspect of the discipline, and we’ve covered this in many
posts here.
 Consistently Meet Goals- Operations must perform within statistically acceptable upper and lower
control bounds. Everything the vendor manager does should focus on meeting goals, from providing
forecasts to defining requirements, from ensuring vendors have adequate staff to ensuring the staff have
completed all required training.

Strategies to Strengthen Vendor Relations

Vendor management allows you to build a relationship with your suppliers and service providers that will
strengthen both businesses. Vendor management is not negotiating the lowest price possible. Vendor
management is constantly working with your vendors to come to agreements that will mutually benefit both
companies.

1. Share Information and Priorities

The most important success factor of vendor management is to share information and priorities with your
vendors. That does not mean that you throw open the accounting books and give them user IDs and passwords
to your systems. Appropriate vendor management practices provide only the necessary information at the right
time that will allow a vendor to better service your needs. This may include limited forecast information, new
product launches, changes in design and expansion or relocation changes, just to name a few.

2. Balance Commitment and Competition

One of the goals in vendor management is to gain the commitment of your vendors to assist and support the
operations of your business. On-the-other-hand, the vendor is expecting a certain level of commitment from
you. This does not mean that you should blindly accept the prices they provide. Always get competitive bids.

3. Allow Key Vendors to Help You Strategize

If a vendor supplies a key part or service to your operation, invite that vendor to strategic meetings that involve
the product they work with. Remember, you brought in the vendor because they could make the product or
service better and/or cheaper than you could. They are the experts in that area and you can tap into that expertise
in order to give you a competitive advantage.

4. Build Partnerships for the Long Term

Vendor management seeks long term relationships over short term gains and marginal cost savings. Constantly
changing vendors in order to save a penny here or there will cost more money in the long run and will impact
quality. Other benefits of a long term relationship include trust, preferential treatment and access to insider or
expert knowledge.
5. Seek to Understand Your Vendor's Business Too
Remember, your vendor is in business to make money too. If you are constantly leaning on them to cut costs,
either quality will suffer or they will go out of business. Part of vendor management is to contribute knowledge
or resources that may help the vendor better serve you. Asking questions of your vendors will help you
understand their side of the business and build a better relationship between the two of you.

6. Negotiate to a Win-Win Agreement

Good vendor management dictates that negotiations are completed in good faith. Look for negotiation points
that can help both sides accomplish their goals. A strong-arm negotiation tactic will only work for so long
before one party walks away from the deal.

7. Come Together on Value

Vendor management is more than getting the lowest price. Most often the lowest price also brings the lowest
quality. Vendor management will focus quality for the money that is paid. In other words: value! You should be
willing to pay more in order to receive better quality. If the vendor is serious about the quality they deliver, they
won't have a problem specifying the quality details in the contract.

8. Vendor Management Best Practices

Whether you're a multimillion dollar company or a small business with a few employees, here are some Vendor
Management Best Practices that any size business can use.

ADVANTAGES TO MANUFACTURERS:

• Lower inventory investments (raw and finished)

• Better scheduling and planning

• Better market information

• Closer customer ties and preferred status

ADVANTAGES TO RETAILERS:

• Fewer stock-out with higher inventory turnover

• Better market information

• More optimal product mix

• Less inventory in channels (transfer costs)

• Lower administrative replenishment costs

VENDOR MANAGEMENT SUCCESS FACTORS:

• Top management commitment

• Focus on effort

• Trust and partnership between supply chain stakeholders

• Highly effective computer/information systems (EDI, Bar coding, Scanning)

• Competent manufacturers and the ability to forecast

• Willing stakeholders partners and patience

VENDOR RELATIONSHIP MANAGEMENT:

VRM or vendor relationship management is a category of business activity made possible by software tools that
provide customers with both independence from vendors and better means for engaging with vendors. These
same tools can also apply to individuals' relations with other institutions and organizations

VRM tools provide customers with the means to bear their share of the relationship burden with vendors and
other organizations. They relieve CRM of the perceived need to "target," "capture," "acquire," "lock in,"
"direct," "own," "manage," and otherwise take the lead of relationships with customers. With VRM operating on
the customer's side, Customers are also involved as participants.

Selection of Vendors

1. The production capabilities of the vendor

(a) Capacity to manufacture the required product in desired quantities.

(b) Possibility of future expansion in capacity.
(c) The understanding or the knowledge of the vendor regarding the buying company and its need.

2. The financial soundness of the company

(a) The vendor company’s capital structure.

(b) Whether it belongs to a larger group of companies; whether it is a Private Limited or a Public Limited
company.
(c) The profitability record of the company in the past.
(d) Expansion plans of the company in the future.
3. Technical capabilities

(a) Whether the available machines are capable of the required quality of materials? What are the future plans
of the vendor?
(b) Whether there are enough technical skills available with the vendor?
(c) Whether there is proper research, design and development facility available with the vendor?
(d) What is the record of the vendor in filling the orders of other buying companies in the same business?
(e) What has been the consistency in the quality produced by the vendor?
(f) Whether the vendor has appropriate storage and warehouse facilities to retain the quality of the product
produced?
(g) Whether proper quality control procedures are being followed in the vendor company?

4. Other considerations

(a) What are the working conditions in the vendor company?

(b) How are the industrial relations in the vendor company?
(c) Whether there is any possibility of disruption of the supply of materials in terms of quantity and/or quality
due to human relations problem in the vendor company?

The Vendor Managed Inventory Approach

VMI reduces stock-outs and reduces inventory in the supply chain. Some features of VMI include:-

 Shortening of the supply chain

 Centralized forecasting
 Frequent communication of inventory, stock-outs, and planned promotions. Electronic Data
Interchange (EDI) linkages facilitate this communication.
 No manufacturer promotions

 Trucks are filled in a prioritized order. For example, items that are expected to stock out have top
priority, then items that are furthest below targeted stock levels,
thenadvance shipments of promotional items (promotions allowed only in transition phase), and finally,
items that are least above targeted stock levels.

 Relationship with downstream distribution channels

  Result: Inventory reduction and stock-out reduction

The Advantages of Managed Inventory

More Accurate Data

 With vendor managed inventory, information is passed back and forth in a computerized format. That
automation can greatly reduce the number of keying errors and make the resulting inventory numbers
more accurate. In addition to better accuracy, the VMI system is also faster, resulting in more up to
date inventory numbers.
Better Service
 Since both the vendor and the retailer have a vested interest, vendor managed inventory can improve
customer service and help all parties involved. The vendor works to ensure that the requested products
are in stock, the retailer supplies the products to the customers and the customers are satisfied. This
mutually beneficial arrangement is one of the main advantages of a vendor managed inventory system.
Partnership
 With a vendor managed inventory system, there is a true partnership between the manufacturer and the
distributor. That partnership helps all parties work more efficiently. The fact that both parties are
working toward the same goal can also enhance customer service and employee morale.

Purchase Orders
 Having a vendor managed inventory system in place also makes it easier to generate purchase orders
on an as-needed basis. With VMI, purchase orders are generated on a predefined basis, making the
entire process more streamlined and efficient.

Decreased Inventory Levels

 Vendor managed inventory lets the distributor and the manufacturer work more efficiently. This
reduces the need for high levels of inventory at the distributor, which can reduce costs and boost
profits.

Easier Forecasting
 With vendor managed inventory the manufacturer has access to the distributor's point of sale system.
That makes it easier for the manufacturer to forecast sales and determine the proper production
schedules.
Origin of Vendor Managed Inventory
VMI started in the retail business and grew out of Efficient Consumer Response (ECR),
where consumer satisfaction or rather consumer expectation of stock availability is an important way to have a
competitive edge over others. Wal-Mart is one of the successful pioneers of this supply chain strategy.
VMI is now gradually progressing towards strategic- partnership based forms. These
influences the way companies plan, their inventory, evolving to Collaborative Planning, Forecasting and
Replenishment (CPFR).

Usage of Vendor Managed Inventory

 Error sensitive industries. Example: Pharmaceutical Sector.

 Multiple outlets, fast-moving consumer goods. Example: Wal-Mart.

 Perishable goods. Example: K Mart.

 Valuable and unpredictable components. Example: PC manufacturing.

 Strong competition (small margins). Example: Automotive

Steps in Vendor Managed Inventory

VMI should be achieved in a number of phases:-

1. Communicate expectations of all parties.

2. Retailer/distributor must commit to sharing precise information.
3. Vendor must ensure reliable transmission, receipt, and use of information.
4. Agreement on ordering policy, risk and reward sharing.
5. Commit time and resources.
6. Extensive testing.
7. Implementation and evaluation. Adjust.
8. Appreciate vendors that manage the inventory well. Example: promotion to Category Captain, profit sharing
schemes, etc.

Strengths of Vendor Managed Inventory

 Supply Chain level

 Lower inventory levels at total supply chain level.
 Less overhead
 Increased sales.
 Reduces human data entry errors.

 Vendors
 Better insight in customer demand (better resource usage, reduced raw and finished goods
inventories).
 Improved, more direct communication with customers.
 Improved market analysis.
 Increased sales via lower out of stock rates.
 Opportunity to provide category management and other value-added services.

 Suppliers

 Reduced replenishment times and lower inventory costs.

 Increased sales through reduced stock outs.
 Less redundancy.
 Build strategic strengths through establishing strong supply chainrelationships.
 Vendor assistance with category management.

 End-users
 Increased service level.
 Reduced stock outs
 Assumptions of Vendor Managed Inventory
Vendor Managed Inventory is usually successful for industries and organizations with the following
characteristics:
 Multiple outlets, because this increases the benefits compared to traditional inventory management.
 Severe consequences in case of human errors (Pharmaceutical).
 Industries with steady and high volumes (Retail, Consumer Products).
 Industries with high-value inventory and a high level of demand unpredictability (High Tech).
 Management with strong leadership capability to form strategic long term partnerships (Automotive).

Vendor Managed Inventory Implementation Challenges

Vendor Managed Inventory can be made to work, but the problem is not just one of logistics. VMI often
encounters resistance from the sales force and distributors. At issue are roles and skills, trust, and power shifts.
Some of the sales force concerns are:
 Loss of control
 Effect on compensation – incentive bonuses may depend on how much is sold, but sales force has less
influence under VMI.
 Possible loss of job
 Scepticism that it will function well – technical problems
 Concern that reduced inventory will result in less shelf space and therefore loss of market share. This concern
can be addressed by filling the shelf space with other stock keeping units from the same vendor.

Goals of VMI:

The goal of Vendor Managed Inventory is to provide a mutually beneficial relationship where both sides will be
able to more smoothly and accurately control the availability and flow of goods. The following topics are
covered:

 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 stock
outs, 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.

Common Mistakes

 Unexpected demand changes by the customer need to be shared with the supplier. Changes in demand
could result from the customer acquiring a new, large customer opening of a great deal of stores in a
short period; or offering special promotions that create spikes in demand. The supplier may be unable
to schedule production or shipment in a timely manner, causing a drop in inventory available for the
customer to sell in the event of a foreseen increase in demand. A spike in demand could also create a
burden on the supplier, who will have to reprioritize its production plan or inventory from one
customer to another. Likewise, if the supplier is experiencing a significant spike in demand from a
major customer, it may be wise to let the VMI customer, and other customers as well, know that the
supplier will have very little flexibility over a certain period of time, so that everyone can adjust
accordingly.

 The most common cause of VMI failure revolves around communication breakdowns. All of these
problems in implementing a VMI program can be significantly diminished if they are adequately
addressed at the beginning of discussions. Hence, there should be several in-depth meetings upfront to
avoid problems down the road.

Development

VMI is a stepping-stone toward an emerging process, Jointly Managed Inventory. In Jointly Managed
Inventory a partnership between the supplier and customer is formed. This solidifies the
current VMI relationship.

Jointly Managed Inventory (JMI) is a much more detailed extension of VMI but the goals and premise are
quite similar. It takes the foundation from which the relationship has already been built and fine-tunes it.
This partnership involves increased tactical planning between the supplier and customer when
developing JMI. This should include, but is not limited to, the customer integrating the supplier into the
customer’s point-of-sales (POS) system, for example.

This integration allows the supplier to gain insight into real-time sales data to further improve the
replenishing function while being able to better plan its own production/distribution system to meet the
customer’s needs. Proceeding to this step will further solidify the relationship and produce a favourable
outcome for each party

Three Steps in Making (VMI) Work

How to Make VMI Work?

 Clarify expectations. There needs to be thorough discussion about how the system will benefit both
organizations in the long term or one of the parties, particularly the supplier, is prone to disappointment
with some of the short-term results. If these items are not addressed the program will likely be
 terminated quickly with neither side gaining any of the benefits expected from the program. The
objective is clear and constant communication between the supplier and customer. When the two
parties work in conjunction they can be assured that the planning function, for both sides, will begin to
smooth over time.

 Agree on how to share information. If the supplier and customer can agree to share information vital to
restocking in a timely manner, then the odds of a synchronized system will dramatically improve.
Proprietary information would not have to be shared between the supplier and customer, but enough
information to maintain a steady flow of goods is necessary. The customer should be willing to share
production schedules and/or forecasts to provide some visibility for the supplier.

 Keep communication channels open. When the two parties set out to implement a VMI program, they
need to meet and discuss their goals and how they need to proceed in order to realize those goals. Once
a VMI program has been activated, each side needs to understand that there are going to be some
miscues. These miscues need to be studied as opportunities for learning and then used to avoid
repetitive problems in the future.

Six Steps to a Successful VMI System

1. COMMUNICATE expectations of all parties. Customers and suppliers must make the effort to sit
down and discuss the goals and objectives of implementing VMI. The importance of this step cannot be
overstated. Both parties’ hardware and software requirements must be identified, and an understanding
must be reached in terms of how both companies’ systems will communicate. Then a plan for
implementation must be mapped, specifically identifying each party’s financial and other
responsibilities.

2. Customer must commit to sharing PRECISE information. Suppliers must have visibility into the
customer’s internal sales and inventory information. Without accurate data, ability to quickly meet
demand will be impaired.

3. Suppliers must ensure RELIABLE transmission, receipt, and use of information. To facilitate step 2,
the supplier must be able to guarantee that the customer’s trusted information will be communicated,
received, and utilized securely and thoroughly to meet the designated needs. Time should be spent
during the planning phase discussing information precision and reliability.

4. Sufficiently TEST systems before going live. As with any new system, testing will uncover any bugs or
inefficiencies and can help to avoid future headaches.

5. Expect implementation to be a PROCESS not a project. Remember that there is no on/off switch.
Adjustments will have to be made as demand levels fluctuate, and no system will be perfect 100% of
the time.

6. Plan to spend sufficient TIME AND MONEY to make it work. Most successful VMI systems we’ve
read about took 2-2.5 years to put into operation, and cost hundreds of thousands of dollars for IT and
training. Spending (or finding) the time to create a comprehensive system can be a challenge.
Four Stages of the Fully Automated VMI Model
1. Collaboration
In business environments where thousands (or 10’s / 100’s of thousands of) SKU’s have to be managed daily,
collaboration at the tactical (item) level is impractical, costly and error prone. The more effective collaborative
process is at the strategic level, where overall service and inventory investment goals are agreed upon, along
with he constraints within each company. The collaborative stage is critical in establishing the goals and key
performance indicators for the VMI relationship. Periodically, this stage is revisited to review current
performance and adjust or reconfirm the goals and constraints. The impact of this strategic collaboration is a
commonality of metrics and focus between supply chain partners.

2. Planning

The key to automating a replenishment process, and achieving world-class inventory /service performance is
employing comprehensive, dynamic, exceptions based replenishment software. Software tools that is
comprehensive enough to effectively manage a variety of demand patterns. Dynamic enough to automatically
detect and adjust to changing demand patterns, goals and constraints. Exceptions based to allow for an
automated flow of information and product when the outcomes are within expectation. If exceptions are
detected, they are analyzed for degree of importance and the user is automatically prompted for action.

3. Execution

In dynamic, volume intensive supply chains inventory conditions can change suddenly. One day inventory
levels are adequate, the next day the inventory may be depleted (due to increasing sales!) or critically low,
creating the likelihood for a service interruption. Each day the current supply chain positions (inventory, booked
orders, special commitments, in-transit and future requirements) are analyzed against the plans to automatically
determine the course of action. When the Collaboration and Planning stages are done properly, the Execution
stage becomes automated with very few exceptions, requiring scant human interaction on a daily basis.
Furthermore, the Execution stage can provide suppliers with valuable information beyond a purchase order
quantity, enabling improvements to the order fulfillment and inventory allocation processes.

4. Assessment

The old adage holds true in VMI, what gets measured gets fixed. Set the goals, determine the plan, execute
against the plan, then measure how you did. The Assessment stage tells the VMI partners how they are doing
against the goals. And within the software, diagnostic information is fed back into the planning stage in a
continuous effort to close the gap between theory (plan) and reality (result). In many instances a VMI
relationship is the first time supply chain partners both have access to, and are measuring performance using the
same metrics. When two companies are focused on the same goals and have access to the same key performance
metrics, a true supply chain partnership emerges, resulting in a better performing supply chain.
Supply Chain Impact

Inventory is the proxy for information. In the absence of timely and accurate consumption data, each node in the
supply chain compensates for the lack of information with inventory. Not only does poor information flow build
supply chain inventories, but it also restricts each company’s ability to react to increases in demand, causes
extended outages, service interruptions and lost sales. As actual demand for products is disseminated up the
supply chain in a more real time environment, the more closely aligned production is with demand. As the gap
between production and demand diminishes, so to does supply chain inventories and service level interruptions.

The ultimate goal is supply chain excellence, as defined by service, speed and cost. Delivering the best service
at the point of consumption in the least amount of time at the lowest total cost. The result is a supply chain that
has an automated, timely flow of information triggering replenishment activities that anticipate demand
accurately.

For the replenished location, the major benefits are:

• Increased Service Level To The End Customer
• Increased Sales
• Increased Return On Assets
• Elimination Of Routine Replenishment Activities
• Reduced Fulfillment Costs / Lead Time

• Improved / Expanded Relationship With Supplying Organization

For the supplier, the major benefits are:

• Increased Service Level To The End Customer
• Increased Sales Through To The End Customer
• Reduced Fulfillment Costs / Lead Times
• Improved / Expanded Relationship With Replenished Organization
• Smoother Demand Patterns
• Elimination Of Human Errors

Keys to Success

VMI delivers tangible results throughout the supply chain. As the concepts and practices of ‘lean’ extend
beyond the manufacturing floor down through the supply chain, VMI is the enabling process to drive out costs
and time. To ensure you realize the full impact of the VMI experience, follow these keys to success:

1. Set, review and maintain performance goals

2. Manage all SKU’s through VMI to minimize supply chain transactions
3. Spend the time and effort up front to ensure data accuracy
4. Utilize local market intelligence to augment the automated replenishment decisions
5. Conduct periodic performance reviews
6. Use the metrics to find cost and inefficiencies, then work together to eliminate.
REFRENCES.
http://scm.ncsu.edu/scm-articles/
http://www.vendormanagedinventory.com/newsletter_spring08.html
http://rising-entropy.blogspot.com
http://www.iimm.org
http://www.ithound.com/
http://www.vendormanagedinventory.net/