When a manufacturing company uses many components for their finished goods, they find that they can spend a lot of time in forecasting, ordering and receiving thousands of items. In many cases, these items are supplied by only a few vendors.
As companies try to improve customer service and reduce costs, they are looking to their suppliers to provide them with a service that benefits them and provides the vendor with a level of security. One way in which this can be achieved is for companies to adopt a vendor managed replenishment (VMR) program.
This is similar to the vendor-managed inventory (VMI) programs that companies use but has several differences.
VMR vs. VMI
In the vendor managed inventory (VMI) model the vendor will own the inventory and will replenish inventory based on pre-agreed min-max quantities. The customer owns the inventory once it is removed from the warehouse and can sometimes have liability for inventory that has not been removed.
With vendor managed replenishment (VMR) programs, the customer owns the inventory and the vendor is responsible for replenishment to pre-agreed, demand-driven min-max quantities. Therefore, with VMR the customer has liability for the goods once they arrive from the vendor, whether they have been used or not.
With the VMR model, the customer has to be vigilant that the min-max levels that they agree to do not allow for too much inventory to be delivered, as they will own whatever inventory is supplied by the vendor.
As with the VMI model the vendor will receive an EDI 852 transaction that informs the vendor of the current on-hand balance and the movement data for each of the items that the vendor replenishes.
Depending on the usage of the item, this can be on a daily basis or weekly, if it is a slow moving item. This information from the EDI 852 allows the vendor to forecast the item for the customer and to calculate the planned replenishment orders to be sent to the customer.
Based on the min-max quantities that have been established as part of the contract between the vendor and the customer, the vendor will create the replenishment orders. The vendor will transmit an EDI transaction, called an EDI 855 to the customer informing them of the items on the order.
The items will be picked for the orders, and the quantities sent to the customer.
The customer uses the EDI 855 transaction to create a purchase order in their system so that when the items arrive they can be checked and received into inventory. After the goods have been received then the vendor can invoice the customer.
Issues With Vendor Managed Replenishment
There are issues with the VMR model for the customer and the vendor. For the vendor, there is the possibility that although they forecast a replenishment value for an item for a customer they may not be able to fulfill that order.
The problem for vendors is that they are supplying items to two types of customer; those who they have a VMR relationship and those who are normal customers.
The problem for the vendor is which customer receives the items if there is a not sufficient quantity to supply both customers.
For the customer, the problem with a VMR relationship is that they are dependent on the vendor producing an accurate forecast of the needs of the customer. If those forecasts are not correct, then the customer could find themselves with a warehouse of items that they do not need, or in a position where they could suffer a stockout due to insufficient stock being supplied by the vendor.
These are the risks of not being in control of their forecasting. In addition, an unforeseen spike in demand may not be identified by a vendors forecasting and leave a customer short of stock to fulfill its own sales orders.
So while VMR can be a valuable tool in optimizing your supply chain and manufacturing operations, it is a process that needs to be carefully managed and audited from time-to-time.
This supply chain article about vendor managed replenishment has been updated by Gary W. Marion, Logistics and Supply Chain expert.