Viewing VMI As A Strategic Imperative
These days, inventory is seen as tantamount to waste. Although overall inventories have gradually dwindled—the total business inventory to sales ratio is around 1.36, compared to highs above 1.5 in the mid-1990s, according to the U.S. Department of Commerce. Many mid-sized businesses still struggle to contend with uncompetitive levels of stocked parts or work in progress.
More worrying is what CIO Magazine identifies as a game of "hot potato." "Rather than being eliminated, inventory has been pushed down into the lower reaches of the supply chain —from manufacturers to top-tier suppliers to lower-tier suppliers," according to the January 15, 2003 issue.
The practice of vendor-managed inventory (VMI) offers a solution for many manufacturing businesses. VMI is a technique for optimizing supply chain performance in which the supplier is responsible for replenishing the customer's parts inventory levels, based on inventory and sales data shared by the customer. VMI has seen increased use by industrial distributors for at least a decade, but with the availability of sophisticated new software to facilitate collaboration, the technique is proving its value in many other situations.
VMI is pivotal to lean procurement strategies. The goal is to never have to produce goods to fill a forecast or a warehouse — only actual customer orders. Essentially, VMI is a "pull" process; it improves service even with substandard forecasts. In general, it is best suited to high-value "A" parts and subassemblies.