Suitability of inbound VMI at a manufacturing company

Abstract

A main challenge for supply chains concerns how to handle the demand planning and inventory management in the order-delivery process. Vendor Managed Inventory (VMI) is a concept that has been applied in order to meet this challenge. In VMI, the responsibility of the replenishment decision is transferred to the supplier and the buying firm shares the required inventory and demand data. The main benefits highlighted in previous research are improved service levels, reduced inventory levels and reduced administration for the customer. However, studies have shown that by applying VMI, all benefits will not by itself be realised. The study object of this report is a manufacturer that operates several VMI setups. The manufacturer has experienced mixed effects from the application. Many studies have been performed on the subject of VMI but there are not many guidelines of the prerequisites for successful VMI application. Therefore, the aim of this study is to develop a supporting framework for deciding the suitability of VMI as a replenishment method at a manufacturing company. In order to fulfil the aim, a VMI suitability framework was constructed based on theoretical findings. The applicability of the framework was further evaluated and improved through a case study at the manufacturer and one of its VMI suppliers. The empirical data consists of qualitative data, mainly collected through semi-structured interviews. Recommendations regarding VMI application in general at the case company were formulated together with guidelines of how to apply the VMI suitability framework at the case company. Firstly, it was found that there are two types of VMI available, which have different effects and also put different requirements on the actors. Secondly, it was found that the type of VMI is dependent on the configuration of VMI at the supplier’s site. Thirdly, the risk in a VMI arrangement consists of performance risk and relational risk. It was found that the suitability of VMI depends on the risk that the parties are willing to take and the type of VMI that is considered.