Question

Large retailers such as Woolworths are using vendor-managed inventory systems (VMI). What, in your view, are the advantages and disadvantages of VIMs to organisations such as Woolworths?

Answer 1

Vendor-managed inventory (VMI) is an inventory management practice in which a supplier of goods, usually the manufacturer, is responsible for optimizing the inventory held by a distributor. Thus, the vendor is responsible for the retailer's ordering cost, while the retailer has to pay for their own holding cost. It is a proven approach to streamlining inventory management and order fulfillment that improves collaboration between suppliers and their distribution partners by aligning business objectives and optimizing operations for all participants. When supply chain partners begin using VMI, they agree upon objectives for:

· Inventory turns

· Fill rates and in-stock percentages

· Transaction costs

The VMI platform monitors actual activity with measurements against those objectives. Data is always available to all parties on demand. The system also alerts all parties when measurements fall outside acceptable ranges or data anomalies are detected. The goal with a vendor-managed inventory relationship is to make sure the retailer only buys what they’ll sell. They maintain closer contact with the supplier, aided by technology, so that they can purchase stock in smaller batches, more frequently.

Most importantly, the burden of inventory management is shifted to the seller, who pushes inventory down to buyers, based on real-time demand.

ADVANTAGES OF VENDOR MANAGED INVENTORY SYSTEM

More Control

VMI gives vendors more control so they can accurately forecast demand. As a result, production can be more efficient. They can practice lean manufacturing and make frequent deliveries. Also, VMI reduces stock levels, and decrease stock shortages. Moreover, vendors using VMI will have total visibility into their customers’ inventory levels. They can better meet demand and reduce inventory errors and costs.

Strengthen Customer-Vendor Relationships

Suppliers are able to develop stronger relationships with their customers through better quality service. Vendors in VMI will become more valuable suppliers. In turn, this will increase the strategic communication. VMI can provide major benefit for both parties.

Reduce Inventory Costs

Since VMI gives vendors control, they can eliminate wastage, non-value adding factors, and other costs. Accurate planning cuts the cost of storing excess inventory and reduces obsolete stock. More importantly, vendors are able to eliminate stock shortages and the high delivery costs to ship expedited orders.

Reduced Inventory Overstocks and Stock Shortages

As mentioned, VMI can reduce overstocks and stock shortages. As a result, they are reducing the factors that cause uncertainty. Not having the right products in stock can be a big problem for customers. Moreover, this can be costly. Sales will be lost from stock shortages and overstocked items will have storage costs.

Increase Sales

VMI can increase sales by ensuring that products are always in stock and available for purchase. Product availability will boost the quality of customer service and create brand loyalty. As a result, this means more returning customers and sales over time

Less Responsibility

Typically, a vendor’s customers are distributors or retailers. They are often receiving from hundreds of different suppliers and many different locations. For this reason, it is hard to keep track of inventory moving in and out. This is where VMI comes in to defer responsibility. It lowers costs, reduces admin work, and allows them to focus their efforts on other areas within their business.

Disadvantages of Vendor Managed Inventory System

As with any other business model, there are some disadvantages of vendor managed inventory.

Supplier That Can't Deliver

When a business relies on vendor-managed inventory, it's placing a big bet on that company's ability to deliver. The vendor has to be able to determine when to send new stock, what specific products to send and in what quantities. This can be beyond the means of a supplier that doesn't have the software, infrastructure or expertise in place to make that work. If just-in-time inventory turns into way-too-late shipments thanks to poor demand forecasts or a supply-chain breakdown, VMI isn't going to work.

Unscrupulous Partners

Even with return policies in effect, a business risks being taken advantage of by a supplier looking to make its numbers. For example, a vendor might ship an excessive amount of product at the end of the quarter and book it as revenue to boost its sales figures regardless of the customer's needs. The customer may return the unneeded merchandise, but the vendor already has gotten what it wants out of the transaction. In addition, VMI may require a company to share sensitive information with the supplier, which can leave it in a delicate position should the relationship between the parties ever falter.

Limited Options

A vendor-managed inventory system can be bad for a business when it keeps the business from seeking better-suited or lower-cost options. Because VMI links the supply chain together so closely, it serves as a disincentive to make a change that necessitates changing the company's inventory management system. As a result, a business may find its inventory savings negated by settling for higher-priced or inferior goods.

Market Responsiveness

Customer preferences can change in a heartbeat, with favorites falling out of style and new items becoming more in demand. If your vendor doesn't supply a wide enough range of products and your contract prevents you from going to the competition, you may be stuck with items your customers don't want and no way to fix the problem. Make sure your contract doesn't bind you so tightly to your vendor that you both sink together when the market changes.

Woolworths is an Australian chain of supermarkets and grocery stores owned by Woolworths Group. Founded in 1924, Woolworths along with Coles forms a near-duopoly of Australian supermarkets, accounting for about 80% of the Australian market. Likewise the Woolworth Company, they can apply Vendor Management Inventory System, because it has more advantages than disadvantages