From the Desk of Tom Guzik, Manager of B2B EDI Solutions at IDEA
Vendor Managed Inventory (VMI) is a supply chain automation tool in which manufacturers (vendors) electronically monitor and maintain their distributors’ inventory levels using electronic data interchange (EDI). VMI automates inventory management and order fulfillment and is growing quickly within the electrical channel, particularly among distributors and manufacturers with a high volume of items and high inventory turns.
How does EDI power VMI?
The VMI process is powered by a VMI engine, which uses both historical sales data and daily or weekly point-of-sale information updates to produce a least-cost replenishment plan. Using EDI to communicate this sales data to the VMI engine will help you to realize the full benefit and ROI impact that make VMI a valuable asset to trading partners. The following suite of key EDI documents support the VMI process and make it more economical and cost efficient:
- EDI Product Activity Data (852) – The EDI 852 is used to communicate item activity such as inventory levels and product movement information. For VMI relationships, this document provides the historical and weekly sales movement information of an item, enabling the manufacturer to auto-replenish the distributor’s warehouse with the appropriate levels of stock. Manufacturers are able to develop a plan to keep inventory costs low while balancing stock availability and avoiding backorders.
- EDI Purchase Order Acknowledgement (855) – The EDI 855 is used to electronically update the distributor’s business system with the VMI engine-generated fulfillment order. The EDI 855 tells the distributor’s EDI system that the incoming document is to be treated as a new purchase order (PO) and updated into the distributor’s business system. Implementing this document creates an automatic means of getting the VMI engine-generated replenishment PO into a distributor’s business system and eliminates the need to manually enter the information.
- EDI Advance Ship Notice (856) – The EDI 856 updates the VMI system with ship dates and confirmation of quantities to be delivered. It is also the means of triggering the receipt of the inbound order and closing out the open PO, adding increased efficiencies to the overall receiving process.
- EDI Order Status Report (870) – The EDI 870 provides a means of updating distributors with planned ship or delivery dates, so distributors can automatically adjust their own promise dates as needed. Pairing this document with the EDI 856 gives a manufacturer the ability to update the distributor of any changed ship dates prior to the product actually shipping from the manufacturer’s facility.
VMI Can Help:
- Removes the time-consuming manual inventory review and re-order process, allowing purchasing reps to spend more time on value-add activities (e.g. price negotiation)
- Eliminates stock outs and excessive inventory carrying costs
- Lessens the risk of disintermediation and strengthens the partnership between trading partners by allowing distributors to link themselves more tightly with the manufacturers
- Allows for quick response to demand while maintaining lower inventory
- Enables more efficient production planning schedules by providing more accurate demand usage and inventory turns
- Eliminates need to process costly rush orders and unscheduled production runs
Stay tuned for more information about VMI, to help you better understand the growth of its use in the electrical channel and decide if it’s right for you and your trading partner community.