VMI (Vendor Managed Inventory) and lean manufacturing
Lean manufacturing treats work in progress (WIP) as a waste. In fact every imperfection in the system creates the requirement to build work in progress in the system. So the WIP is also known as the mirror of wastes in the system.
On the other hand, most of the brand owners and buyers are moving towards a concept called VMI or vendor managed inventory. Basic principle of VMI is managing inventory by the vendor on the behalf of the buyer. By doing this customers can focus on their core business of selling. Most of the times buyers are prepared to pay some extra money to the vendors for managing their stocks on their behalf.
Why the vendor wants to manage an inventory? Why there is an inventory at all? First reason is the higher lead-times and large batch manufacturing of the vendors. This makes it difficult to deliver goods in small batches as an when requirement comes up. On the other hand it is also the inability of buyers to capture the requirements fasts and transmit that information down the line. This leads to managing of inventories either with the buyer as finished products or with the vendor as goods to be shipped.
Inventory in finish goods form is harder to manage. But when the inventory is managed by vendors they can manage it in other forms for an example as raw materials and as semi finish goods. Vendors will happy to have a VMI type of orders than a normal order. But the reality is in whatever form inventory is a waste. So in the ideal scenario vendors would manufacture goods as and when the buyer wants it and then will dispatch to the vendor instead of pulling goods from the inventory and sending it to the buyer.
Although VMI or vendor managed inventory have the term “managing the inventory” it does not necessarily mean that vendor should have a huge inventory. A lean manufacturer would be able to get the best advantage of this concept than a traditional manufacturer if managed carefully. Having a front end working in VMI model and the back end of the business working with lean manufacturing makes a powerful combination. Vendors order goods when they want it in small frequent batches. Manufacturers do their manufacturing when they receive the order in small batches with a very short lead-time. Isn’t this the ultimate lean manufacturing system?
On the other hand, most of the brand owners and buyers are moving towards a concept called VMI or vendor managed inventory. Basic principle of VMI is managing inventory by the vendor on the behalf of the buyer. By doing this customers can focus on their core business of selling. Most of the times buyers are prepared to pay some extra money to the vendors for managing their stocks on their behalf.
Why the vendor wants to manage an inventory? Why there is an inventory at all? First reason is the higher lead-times and large batch manufacturing of the vendors. This makes it difficult to deliver goods in small batches as an when requirement comes up. On the other hand it is also the inability of buyers to capture the requirements fasts and transmit that information down the line. This leads to managing of inventories either with the buyer as finished products or with the vendor as goods to be shipped.
Inventory in finish goods form is harder to manage. But when the inventory is managed by vendors they can manage it in other forms for an example as raw materials and as semi finish goods. Vendors will happy to have a VMI type of orders than a normal order. But the reality is in whatever form inventory is a waste. So in the ideal scenario vendors would manufacture goods as and when the buyer wants it and then will dispatch to the vendor instead of pulling goods from the inventory and sending it to the buyer.
Although VMI or vendor managed inventory have the term “managing the inventory” it does not necessarily mean that vendor should have a huge inventory. A lean manufacturer would be able to get the best advantage of this concept than a traditional manufacturer if managed carefully. Having a front end working in VMI model and the back end of the business working with lean manufacturing makes a powerful combination. Vendors order goods when they want it in small frequent batches. Manufacturers do their manufacturing when they receive the order in small batches with a very short lead-time. Isn’t this the ultimate lean manufacturing system?
2 comments:
One implementation of VMI is the concept of drop-shipping, where items are ordered via a marketplace such as Amazon or eBay, but is fulfilled by the owners or manufacturers of that inventory.
There are a few challenges with VMI: (1) a technology, supply chain information flow challenge and (2) overall systems and process challenge.
Regarding (1), integrating supply chain systems and virtual versus physical inventory is challenging. Connected to this is the notion of service level, which includes demand rate, lead time, and variability all along the supply chain, of both information and material flow.
On (2), the challenge is also in alignment of philosophies: the supplier might have a different philosophy than the front-end store. For example, the front-end store might subscribe to a Lean approach to business, but the fulfiller of orders might not. This translates into potential challenges or opportunities with the relationship overall.
Here's another example: The Lean Institute uses Amazon as a marketplace. The Lean Institute obviously wants to subscribe and follow a one-piece flow approach to fulfillment. But, Amazon requires that there be inventory at a physical Amazon.com warehouse. The inventory policies of both firms seemingly clash. What does the Lean Institute do? The Lean Institute conceded and obeys what Amazon.com requires. Why? Revenue and Cash Flow. Hence, two philosophies that clash.
So, is it the ultimate lean manufacturing system? Well, it depends. If all the supply chain partners -- up and down the supply chain -- subscribe to the same philosophy of Lean, then potentially the answer is "yes." If not, then the effects of the "bullwhip effect" and other symptoms of variability will still be present.
Nice post. Keep up the good work.
Hi Pete;
I always believe being lean only in one aspect of the business is not going to explore the full potential of lean manufacturing. Lean concepts must be obeyed throughout the supply chain to give the customer the ultimate advantages of lean.
If only parts of the supply chain are lean it is most likely to shift the wastes from the lean practitioners to the non lean organizations. For an example if the front end is working on lean and if the back end or the manufacturing is not this will transfer the wastes from the front end to the manufacturing unit. For an example the inventory will be with manufacturers not with front end.
This is why I want my readers to understand the importance of making their making
their supply chain lean not parts of it.
Thanks for your valuable comments
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