Vendor-managed inventory (VMI) is one of the most widely discussed partnering initiatives for improving supply chain efficiency in the retail grocery industry today. The practice was first tested by Wal-Mart and Procter & Gamble in the late 1980s. Over time, successful VMI initiatives have been implemented by Johnson & Johnson, Frito Lay, Campbell Soup, and Barilla, the pasta manufacturer and numerous other regional and national firms.
In a VMI relationship, retailers transfer the financial responsibility for inventory management to the supplier to the point where the supplier makes inventory replenishment decisions for the retailer. The supplier monitors the retailerâ€™s inventory levels and makes periodic re-supply decisions regarding order quantities, shipping, and timing. The arrangement transfers the burden of asset management from the consuming organization (the retailer) to the vendor, who may also be obliged to meet specific in-stock targets.
Demand predictability is complicated by perishable inventory to the point where accurate and timely information on a store-by-store basis is paramount to the supplierâ€™s ability to maintain the proper balance of carrying enough inventory on hand, without forcing shrink (spoilage or waste) to a level that cripples profitability. However, the upside is that suppliers that are armed with the right information have an opportunity to monitor and manage their own inventory with far more accuracy than they are accustomed to receiving from their overburdened retailer partners.
Additionally, being closer to accurate movement figures gives suppliers increased production management abilities. The added bonus that suppliers, retailers, and consumers receive comes in the form of increased focus on the SKUs being managed. This results in better assortment planning, fewer stock-outs, and reduced shrink.
The real reason that VMI hasnâ€™t proliferated is in part due to a lag in technology and analytic capability. But, that can now be solved with improved data capture, better forecasting capabilities, real-time inventory management tools, item-level assortment planning, and faster replenishment. With advanced VMI technology, the supplier has a more accurate view of demand and can plan more effectively, which leads to better in-stock positions and better customer service.
The delicate balancing act of managing proper perishable stock positions can only be achieved with highly accurate and action-oriented data analysis. The supplier must have access to product movement and true item-level profitability on a weekly, daily, or even an hourly basis. And, the technology used must have the ability to deliver these figures on a store-by-store basis so that proper store groups can be set up and analyzed for the most accurate and efficient production and shipment levels.
We believe that VMI is the wave of the future for the retail grocery world. Technological advances are here to enable VMI for perishable products at an affordable level for suppliers. Smart companies are increasing their investments in advances and practices that change the traditional supplier-retailer relationship to deliver fresher, more attractive perishable items to consumers.