Time to reconsider VMI?

I first wrote about vendor-managed inventory (VMI) back in the 1980s. That first article described how a snack-food company maintained its own inventory at each store operated by a well-known grocery chain. The snack-food maker took responsibility for monitoring stock levels on the assumption that it was in its own interest to keep enough inventory on the grocer's shelves and thereby minimize lost sales. Each day, therefore, a deliveryman would show up at the stores to restock the shelves and arrange the displayed items to catch the consumer's eye.

Since then, the practice of VMI has spread throughout the retail and grocery industry, and even into other industries like the gasoline retail business. In fact, most big-box retailers employ this practice with many of their key suppliers today.

But many consumer packaged goods (CPG) manufacturers now are starting to rethink the value of VMI. "I've been to probably 50 CPG companies in the last couple of years, and I cannot think of one that is interested in increasing its VMI base," Robert F. Byrne, chief executive officer of the software vendor Terra Technology, told me recently.

In fact, Byrne said he knows of many companies that are cutting back on their use of VMI, and even of one multinational CPG company that's planning to stop the practice altogether next year. Why the change? "The basic feeling is that VMI is too expensive [in comparison to] the benefits," he said.

A successful VMI program depends on accurate forecasts of consumer demand, which have proved elusive. Instead of VMI, most CPG manufacturers would rather rely on point-of-sale data to get a clearer picture of what inventory should be on hand to meet demand. The demand signal or point-of-sale information gleaned from the cash register would drive replenishment as well as store-level inventory holdings. Byrne said the adoption of this approach would allow for automatic replenishment of store merchandise— "something that never worked in VMI."

Vendor-managed inventory places the burden squarely on the manufacturer. As more manufacturers look to tighten production and reduce inventory holdings in these trying economic times, they want more help from their retailer customers, or at least more access to their data. It will be interesting to see to what extent retailers will be willing to share that data with their suppliers.