In an environment where production is based on many global suppliers the VMI concept is becoming increasingly important. The manufacturer hands over the responsibility for replenishment to the supplier by deciding the days of supply needed. The manufacturer also request the supplier to keep the stock in the VMI operations until it is called off for production.

A Vendor Managed Inventory can offer many benefits such as reduced working capital, coordination of processes between manufacturer and supplier, reduction of obsolete material. It offers a lean production concept where stock is kept at a minimum based on market data. However in order to achieve these benefits it is necessary to design the VMI operation to meet the production objectives. The design of a VMI Hub will require a number of key processes and detailed sub processes. It need to involve the manufacturer, supplier and the logistic service provider.

The design of a VMI Hub needs, but are not limited to, the following core processes:

Legal documents describing the requirements and responsibilities     between supplier and manufacturer

Procurement of inbound (to the VMI Hub) logistic services

Deployment of a Warehouse Management System creating visibility     of the inventory to the supplier and manufacturer

Deployment of a Transport Management System making it possible     with visibility of the inbound supply chain to the VMI Hub

Receiving and inbound verification

Quality Inspection

Storage

Inventory Control

Line replenishment  (FIFO=First In First Out)

Returns to Supplier

Reporting  ( Key Performance Indicators)

On top of this a VMI Operation needs to be supported by the management of the suppliers. The suppliers needs to have a detail understanding of the entire process in order to meet the requirements. Many times are failure to meet the Key Performance Indicators associated with penalties on the suppliers behalf. It is accordingly critical for the supplier to have full visibility to the manufacturers production plans and demand forecasting. A successful VMI Operation requires Demand Chain Leadership®. It is the demand that will triggers the entire behavior in the Supply Chain from Supplier through the VMI Hub in to the production.

Here is an example of saving of a VMI Operations within the High Tech Industry

The outcome of this VMI operation  equaled  an 85% reduction in total cost of procurement (not including part cost).

Because of the ownership of the components in a VMI Operation it is ideal for a 4 PL Operator. Since a 4 PL Operator has a neutral ownership it can always focus on the core process of the manufacturer. There are no owner obligations towards a Logistics Service Provider or any other partner in the Supply Chain.