Methodologies and Attributes Implemented in the Vendor-Managed Inventory (VMI): A Literature Review

Methodologies and Attributes Implemented in the Vendor-Managed Inventory (VMI): A Literature Review

Irma Ruth Perez (Universidad Autónoma de Ciudad Juárez, Mexico), Liliana Avelar Sosa (Universidad Autónoma de Ciudad Juárez, Mexico) and Jose M. Mejia (Universidad Autónoma de Ciudad Juárez, Mexico)
DOI: 10.4018/978-1-7998-0202-0.ch018

Abstract

This chapter presents a literature review about the vendor-managed inventory as well as the methods which improve management, to discover, describe, and analyze methodologies that have been used to support the process of the VMI integration and coordination in the supply chain. Authors focus generally on the advantages that are offered by the VMI to achieve cooperation in a vendor-customer relationship. Results reveal that there is a diversity in the methodologies that were implemented, which perhaps relies on the game theory as a recent methodology that was included to achieve long-term relationships between vendor and customer, because currently supply chains are operating in dynamic environments that require greater efforts of integration among all participants or members.
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Introduction

The supply chain has become more complex due to globalization, new manufacturing techniques, and computer revolution, as a result, it is no longer enough to offer products with high quality and low prices, since, greater efforts are required to integrate the supply chain and reduce delivery times, in such a way that the product is available at the right time and quantity as the customer requires. Within the supply chain, the inventory represents an asset for the company, and the greater the stock existing in the warehouse, the greater the amount that is registered in the balance sheet of the company.

In addition, an adequate inventory management allows organizations to be prepared to meet customer requirements and prevent themselves from fluctuations in demand (Pérez, Cifuentes, Vásquez & Ocampo, 2013). In order to achieve an appropriate balance between the supply and the demand, in the inventory, it is necessary to create a relationship between the customer and the seller that facilitates the flow of information, since the inefficiency of the companies to forecast the demand generates a disconnection between the market needs and the operational capacity of the company (Zuanetti Filho, Dias, & Moura, 2018). Also, greater uncertainty in the demand, could lead to higher costs for managing the inventory that exceeds the demand, otherwise it could be incurred in not having enough inventory available for customers.

Furthermore, tools such as VMI (Vendor-Managed Inventory) have been developed for promoting a practice that allows a quick response from the seller to the final demand, which represents a high level of association, where the seller is the main decision-maker in order placements as well as in the control of inventories (Serna, Jaimes, & Otero, 2011). The VMI is an integrating system of the Supply Chain that interrelates two or more sources with the objective that the information flows quickly and effectively. In this tool, there are several members from the supply chain involved: manufacturing companies, distributors or wholesale stores, which are part of a supplier-client relationship, these members must make decisions about different types of conflicting situations related to the inventory management. In Figure 1 this decision-making process is shown, which is based on a strategy where two members from the supply chain intervene, in this specific case; a supplier and a customer.

Figure 1.

Decision-making process based on VMI

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The decision-making in the VMI is limited by the different type of interests, the main objective of the client will be to ensure high levels of service with a low cost of inventory, while for the supplier will be to reduce costs for production, inventory, and transportation (Marquès et al., 2010). A barrier for achieving the success of the VMI is the difficulty in generating trust among each other; which happens even when some information is shared, the supply chain's actors may resist sharing detailed information due to the fear that this information is revealed to its competitors (Marulanda & Delgado, 2012). In addition, the previous factors make it necessary to use an objective tool for a decision-making that neutralizes the human effect in the agreements for collaboration between the companies, and that supports an effective teamwork among the participating members of an VMI agreement to achieve the integration of the supply chain.

In conclusion, the main characteristic that distinguishes VMI, it is that the supplier has the power to control the decisions on the time as well as the amount of replenishment, which are transferred according to the agreement, the financial responsibility for the inventory, if it is supported with the monitoring of the inventory level and information systems, which operation is critical for the system, because the data must be in the best possible quality; Also, the customer has less authority in the VMI system than in the traditional system, since the supplier is responsible for managing inventories in the buyer's warehouse, including orders and inventory maintenance; they must receive direct information about market demands.

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