VMI on the Rise with U.S.

Retailers

Why write about VMI? That's right, people (retailers and vendors both) are talking about it a lot right
now. We have talked before about retailers putting more resources into process improvements as
opposed to compliance. VMI (Vendor Managed Inventory) is one [option] of several process
improvements for retailers to either begin or increase adoption. Why VMI? What does it get them?
Reduced administrative costs, improved out-stocks, improved inventory turns. That’s a pretty good
start. What does the vendor get out of the deal? The vendor can reduce inventory/increase inventory
turns, reduce operating costs and a solid relationship with their client. Many people would say
increased sales also results for retailer/vendor due to fewer out-stocks, but some people I have spoken
to say that before a relationship is entered into fill rates are within the top 90th percentile or it
shouldn’t be contemplated. What is VMI?

VMI (Vendor Managed Inventory) is a business model where the Retailer provides product activity
(Typically as an EDI 852) to a Vendor. The vendor compares data in the EDI 852 against model stock
for that particular location (Subtract what should be on the shelf against what is on the shelf = PO
quantity). Once the vendor has this information, the PO is created and follows their normal
replenishment process whether DSD, cross-dock or other. The Vendor takes a much greater
responsibility for maintaining an agreed inventory of the material, usually at the Retailer's warehouse,
but often at stores as well. The goal of VMI is to more closely match the flow of products to consumer
demand while removing inefficiencies. The removal of wasted, redundant shipping, ordering and of
course inventory equals savings to both parties e.g. the reason for the recent interest by several
retailers.

Behind the scenes in VMI and the really hard part of the program are the details which help determine
what the inventory should be for a given location at any particular time. In almost all situations
different amounts should be on the shelf based on time of year or location. Everything in VMI is
geared around item and location. At different times of the year based on weather, holidays,
geography, population demographics, etc. there will be fluctuations in what and how much of a
product is required. The Retailer and Vendor need to come to terms with this. What is a good
example of this… let’s pick on sunscreen lotion. At some point during the year everywhere in the
United States it’s hot enough to get sunburned – this indicates there should be some sunscreen on the
shelf everywhere in the U.S. The question is how much, where and when should it be there. Southern
California will use more than Seward Alaska. More will be used during summer than winter, etc.
Understanding the sales (Demand) per location across a period of time (Seasons) is critical in order for
a VMI program to accurately determine what should be on the shelf. There are several methods for
creating forecasts and they all require a history of item sales per location (Normally two years) as well
as: demand weighting, seasonal profiles, and promotional quantities. Keep in mind many products are
less than ideal for VMI and don’t tend to be reliable for forecasting. Don’t be turned off by all of this.
Most VMI providers have the tools for this built into their systems and their systems simplify the
forecasting process.

You can see that the ‘magic’ of VMI isn’t just the retailer handing off responsibility to the vendor. You
are focusing a team of people on a process which systematically improves the questions: what to ship
where and how much… When VMI works properly you take redundant product and efforts out of the
equation. The VMI process treats each store as potentially a unique set of numbers all treated
uniformly – thus reducing wasted ordering, shipping, transportation, packaging and so on.

What typically defines a VMI (Vendor Managed Inventory) program? They all absolutely vary to some
extent. We can all name 100 retailers that send 850 PO’s – none of those PO’s look the same – but
they will have certain things in common. The same thing is true of VMI. Characteristics of a VMI
program will include:
• EDI capable Vendor and Retailer
• EDI 852’s
• Often EDI 830’s (Forecast document from retailer) and 855’s (Acknowledgement to retailer)
• EDI documents such as 850/880, 856/875, etc depending on what you are selling to whom
• Some method of forecasting
• Retailer pays based on what is shipped – not what is sold (It’s not consignment inventory)
• A high level of trust between both parties
• Collaboration between Retailer and Vendor to determine model stocks

Note: The EDI 852 can hold a massive amount of information relating to sales, returns, damaged and
other vital item/location based statistics. Want to look at the EDI segments of interest in the 852?
Click here.

What about the cost of data? Most Vendors and Retailers pay a VAN or a 3rd party EDI provider for
their EDI transmissions. The 852 document can be huge and there can be a lot of them based on
items and locations so the cost for EDI may look like it goes through the roof. If you look at the list of
Retailers who use the 852, you will see that many of them will also use AS2 or FTP. Also, several
companies absorb the cost for all VMI documents (Like the EDI 852). This in effect removes the
increased data costs associated with VMI. From our research it looks like a vendor could easily get
setup with a retailer to do VMI for under $50K/year. Remember this can include all VMI traffic: not the
850’s but the 852’s and any other VMI related documents.

Who do you buy your VMI solution from? Before you look at whom, first look at what. Just like
everything else, now you need to decide whether you want to run the software/system (Locally) or
have someone else do it for you (hosted). From our research it looks like a vendor could easily get
setup with a retailer to do VMI for under $50K/year (Hosted). This can include all VMI traffic which
makes it much more palatable than it did a few years ago. This makes it much easier to recoup costs
and hit a real ROI, faster. Also consider the support aspect. One of the key characteristics of a good
VMI process is one which provides a means for both retailer and vendor to collaborate.
Implementation of a VMI program can take anywhere from a few days to several months depending on
how well Retailer and Vendor work together – how prepared they are. In some cases, the Vendor or
the Retailer can fail the system for many reasons including: poor item management, lack of trust or
other reasons. We have found across the board that the typical answer you will receive will be
somewhere between 5-15 weeks. The time varies based mainly on how prepared both sides are, the
relationship going into the implementation and like all things the quality of program/project
management.

The cost (Software and implementation) is a little unnerving you say? The retailer sometimes (Rumor
has it) gives the vendor with a few concessions for taking on VMI. Right off the bat the vendor gets a
gold star from the vendor truly partnering with them, but other perks can be discussed such as more
shelf space, terms, etc. When the retail mandates EDI – it looks like an asynchronous burden and
looked at incrementally it absolutely is (99.99% of the time). VMI is not EDI. There is value in this
system on both sides regardless of any concessions – you should still talk about it.

What does all this mean? If you are a vendor, it means you may be able to distinguish yourself to
existing or new clients with VMI. Asking your client to do VMI could be a worthwhile feather in your
cap. For years VMI has been seen as a hard to obtain, hard to setup, very expensive undertaking –
those days are gone. In a Retail market which is not doing much, forward thinking retailers and
vendors are looking for ways to improve their bottom line and that means refining processes to bring
about greater efficiencies. Is VMI something your company is looking at? If not, what are you doing to
improve your efficiency and value proposition?

VMI providers we talked to include: IBM, Datalliance, and many, many others. If you would like help
finding the right vendor for your needs, or have questions about your situation, please contact me
(jimc@retailedi.com) and I will get your questions answered.