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You can get more value from VMI, even with imperfect forecasts

Rob Schoenthaler, Senior Vice President, Deployment, E2open - Thursday, December 15, 2011

A recent article in Supply Chain Quarterly suggests that some consumer packaged goods (CPG) manufacturers are cutting back on their use of vendor-managed inventory (VMI) because accurate demand forecasts, upon which VMI depends, have proven elusive. This isn’t completely shocking, given that effective forecast collaboration is a cornerstone of any VMI program. In order for VMI to work effectively, these three enablers are pretty much non-negotiable across your global trading network:

1. Commitment: Both partners (brand owner and supplier) need management-level commitment in order to make the program a success. Furthermore, management should view VMI as a key component of their overall strategy to enable a demand-driven supply network (because it is). 

2. Agreement: A service agreement must be defined at the part-number level that clearly defines expectations, service levels, and risks. Information spelled out in the contract should include:

• Current manufacturing lead time and standard minimum order quantity
• Number of weeks of forecast demand used for planning
• Minimum inventory levels
• Delivery response time
• Upside percentage and availability period, as well as upside replenishment lead time
• Total liability window (i.e., the number of weeks for which a customer is liable for forecast, not to exceed standard PO-cancellation terms)
• Freshness parameters (i.e., an agreed upon amount of time for which inventory remains under the title of supplier)

3. Forecast and Response: Brand owners should agree to provide electronic forecasts to suppliers, and suppliers, in turn, must agree to respond (positively or negatively) within a stipulated timeframe in order to enable brand owner visibility and action.

Program commitment and service-level agreements are critical to success, but it is the third enabler mentioned above that sets the technological foundation for successful execution of a VMI program.

This “Forecast and Response” component of VMI requires a collaborative, execution-oriented framework in order to function effectively. Access to real-time information across the trading network—plus the ability to collaborate, make decisions, and execute with partners—facilitates the most accurate forecasting possible (although this will never be perfect) and also provides a mechanism for suppliers to respond in a timely fashion. This 360-degree view of component availability and inventory positions enables brand owners to identify and resolve potential exceptions (e.g., shortages) quickly and intelligently.

With the right technological framework, management commitment, and proper service agreements, you can set a VMI program in motion and expect to see a sizeable return on investment—even with imperfect forecasts. Which of these three components is your company missing? Are you looking in the right places for ways to improve your current VMI program?

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