SCM Terminology

VMI (Vendor Managed Inventory)


A method in which a material supplier holds and manages the materials and parts of their customers. For example, the method used by medicine sellers from Toyama Pref. Japan who do house-to-house delivery of medicines.

"VMI (Vendor Managed Inventory)" is a method in which a vendor, i.e. a material supplier, holds and manages materials and parts of their customers. Those consumed are directly regarded as purchased. VMI between Procter & Gamble, Co and Wal-Mart Stores, Inc. introduced in a book called "Reengineering The Corporation" by Michael Hammer is a famous example of a partnership transaction between a diaper manufacturer and their retailer. If a manufacturer and retailer are in a partner relationship that shares POS data having the same goal of increasing customer satisfaction and if they work closely regarding the retailer's inventory as the manufacturer's inventory, sales and inventory can be fully known by the manufacturer and then the manufacturer can place orders with themselves for the retailer. It has been reported that sales greatly increased through this VMI method.

In Japan, the method of selling medicines by household delivery in Toyama Pref. is also the VMI method. The medicine sellers pay regular visits to their customers and supply medicines for the consumed amount. For the medicine sellers, the households, i.e. customers' places, are the place of retailing. In the example of Procter & Gamble, Co., Wal-Mart stores provided the places of sale for the manufacturer Procter & Gamble, Co. If the cost of the place corresponds to a gross margin for a certain period, we can say that Wal-Mart Stores, Inc. runs a real-estate business too.

The VMI method also suggests the need of making strategies such as advertising so that manufacturers can minimize unsold inventory and increase merchandise turnover. It means that manufacturers need to synchronize resource allocations for manufacturing, distribution, and sales. In other words, they need to place importance on creating strategic mechanisms of supply chain management. While the VMI method is a concept that provides an alliance measure for transactions between companies, it is also a tool to form a virtual corporation.

At a sushi-go-round restaurant, plates on the conveyer belt are the vendor (sushi restaurant) managed inventory (VMI), and when a customer picks up a plate and moves the plate to the table, it means that the sushi has been ordered and delivered. For manufacturers, VMI means downstream integration with the distribution industry. For the distribution industry, VMI means an opportunity to move their core business competence close to customers by outsourcing purchase and inventory management to vendors.

Taken with kind permission from the book:
"Understand Supply Chain Management through 100 words" by Zenjiro Imaoka.