Vendor Managed Inventory: How long do we need this?

Vendor Managed Inventory (VMI) or Supplier Managed Inventory is one of the several business models that have been made popular by Walmart since it asked P&G to provide this service at it's distribution centers all across US. Just to make sure we are in the same page, here is a definition of VMI* (It is a family of business models in which the buyer of a product provides certain information to a supplier of that product and the supplier takes full responsibility for maintaining an agreed inventory of the material, usually at the buyer's consumption location (usually a warehouse or a DC). It is often described as a symbiotic relationship where both vendor/supplier (Procter & Gamble) and the buyer (Walmart) have something to gain from it. From a buyer (Often a retailer, but can be a Contract manufacturer) perspective, the values are rather obvious. It relinquishes the responsibility of managing the inventory at DC, cutting PO and worrying about the entire process of making sure that the desired items are available for sales or consumption. Does this come free to it! Often times it has to commit to sharing all the market insights (Forecast collaboration) of the demand to it's vendor. Of course it looses any direct control over the inventory to it's suppliers. 

Supplier in turn gets to plan the inventory based on perfect visibility to actual demand and it's own production capacity. The big "value" comes from the fact that supplier having visibility to both demand (through forecast collaboration) and supply (of it's own manufacturing capacity) can do a better job of planning the inventory than the Retailer itself. Hence the supplier having better access to all the relevant information both at demand and supply side, can manage the process optimally with lesser inventory compared to the retailer. Hence the "value" boils down to the supply chain visibility (i.e. information) that allows optimal decision making and consequently a more efficient supply chain. Now if all those desired information (i.e. visibility) is made available to the Retailer, can it get the job done with equal efficiency? I am always intrigued by this last question and would like to explore it a little bit here.

In the present environment it is rather foolish to assume that "All" the relevant information of the vendor will be available to the retailer. The existing relationship between trading partners does not allow this kind of collaboration. This is because the retailer than can use the information to its own advantage at the expense of the vendor. Since the vendors are already aware of this possibility they are unlikely to provide all the details necessary for the retailer to make the best possible decision. Both parties in fact are aware of this reality and hence we have VMI. 

Does a firm like Toyota having an excellent reputation for developing trust based relationships, need this sort of model? May be not! When businesses worldwide would improve their processes to the extent that VMI would be considered redundant, than it would be safe to assume that we have reached the pinnacle of collaboration in our extended supply chain. Until than VMI is going to stay with us.

* Note: Click here for the Wikipedia site for VMI. 

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