Vendor Managed Inventory (VMI) Concepts

I have been deeply involved in VMI (Vendor Managed Inventory) system architecture and development in Microsoft Dynamics AX for the past year.  As this project is winding down I'd like to post a few articles to share the best practices we followed and lessons-learned along the way.

 

Background

This VMI system is responsible for maintaining inventory at 15,000 customer locations with annual sales of 50 million units.  In addition to the high unit volume, one unique requirement for this system is that the business is completely seasonal with product displays being put up and torn down at various times throughout the year.

The VMI system is a Dynamics AX module, integrated with the AR, Inventory Management, Production, Master Planning, and General Ledger modules.

 

Key Concepts

Below is a basic outline of key VMI concepts and some examples related to my current implementation.

Raw Data Collection
A flexible, fault-tolerant, utility is needed to collect data for use in the VMI module.

• Historical Sales/Shipment data import and storage as a baseline for forecasting and year-over-year comparisons.
• Point of Sale (POS) Import (EDI)
• Shipment Import (Sales Order integration)
• Manual POS or Shipment Import
• Map external (customer-system) values to internal (AX) values

Forecasting
Generate a number of expected unit sales for each item at each customer location during the forecast period.

• Determine forecast period (i.e. forecast upcoming year based on prior years)
• Assign representative forecasting curve to each product at each customer location
• determined by factors such as product type, geographical region, volume of available historical sales, etc.
• Determine forecast by comparing current sales trend with historical forecasting curves.
• Dampen unrepresentative sales trends early in the forecasting period.
• Update Master Planning Sales Forecast

Statistics
Statistics provide real-time reporting for various levels of decision makers and allow for review/audit of system-generated forecasts and replenishment shipments.

• customer-location inventory
• weeks of supply
• sell through percentage
• percent stocked
• highlight notable situations such as "zero sales", out of stock risk, etc.

Recommended Replenishment Shipment
Determine which items, in what quantities, should be shipped to each customer location if a shipment was made today.

• A stocking formula takes into account the forecast sales as well as various criteria.  For example:
• Don't ship more than the customer's capacity to store the item. Maintain minimum stock levels.
• Consider planned replenishment frequency, if specified.
• Consider available inventory
• Create larger orders for smaller customer by shipping a higher percentage of the forecast.

Recommended Replenishment Date
Balance the risk of customer-location out of stock (OOS) with costs associated with the replenishment shipment.

• Consider picking/shipping costs
• Consider who is responsible for merchandising at the customer location
• Don't recommend sending a shipment for a high percentage of the forecast until the forecast is sufficiently mature.

Automatic Replenishment Order Creation

• Replenishment orders are automatically created on a daily basis in response to POS data.
• Allow easy override of system recommended replenishment shipments in response to customer requests or unusual situations.

In future posts, I hope to deal with each conceptual area separately in more detail.  Please feel free to contact me if you are implementing a VMI system and would like to compare notes.