A Framework for Modelling of Vendor Managed Inventory

Abstract

The overall objective of a supply chain is to provide markets with goods while maximizing profit.A product's path from raw material to end consumption involves many actors, and traditionally they aim at maximizing their own profit.However, over the last decades there has been a growing awareness of opportunities for further cost reductions by cross company optimization.Supply chain management involves long term planning of facilities and resources as well as short term planning of production and transport activities.Coordination of activities is a major task within the management of supply chains.When coordination fails, inventories build up and the leanness and cost efficiency of the material flow suffers.Coordination across inter organizational boundaries require collaboration, and over the years many collaboration models have been applied.Some of them have been well defined, structured and based on negotiations and contracts, while others have been based on gentlemen's agreements and business as usual.One model which for some time has been considered State Of the Art in supply chain integration is Vendor Managed Inventory (VMI).VMI is a concept for inventory management aiming to improve the replenishment process (manufacturing and distribution from supplier to customer), and the main objective is to improve product availability without increasing associated inventory, distribution and production costs.The core of VMI is that the supplier has the authority and responsibility to maintain product availability for the customer.The customer places no orders and the supplier does not have to await orders to initiate replenishment.The result of this distribution of responsibility is that one decision level in the supply chain is removed.The effect is that one source of information distortion and delays is removed and the material flow can be related to a more correct demand pattern.Reduced demand information disturbances reduce demand uncertainty, and safety stock levels can be reduced.Decision authority allows the supplier to adjust production and distribution volumes and frequency to smooth his own operation by utilizing the flexibility in the customer's inventory.Suppliers engage in VMI to improve service level, to gain access to advance demand data to improve their own operation and to assure customer retention.Undoubtedly, many suppliers engage in VMI upon the customer's request.For the customer VMI is a form of automatic replenishment.Customers engage in VMI to reduce cost associated with traditional purchasing and inventory management activities, and employees can be engaged in more strategic purchasing decisions.VMI is of particular interest because new and intelligent use of information and information technology is required to make it work efficiently, and VMI is gaining ground in multiple industries worldwide.However, there is little work done to identify what is important parameters for building a VMI collaboration program, both regarding the conditions under which VMI will work and what to include in the planning process.The main purpose of this work has been to develop a framework for how to build a VMI collaboration program.The focus has been on how to obtain logistical benefits, and other Figure 1-11, thesis structure

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