Lean Manufacturing? Lose Weight with Vendor Managed Inventory

Today, more than ever, reducing costs is paramount to purchasing agents and engineers alike in the manufacturing industry — particularly those involved with class "C" components.

However, it is also important to remember that the goal is to cut the fat, not the limb. I think you’ll find the following to be full of useful tips, and shows that relying on cut, cut, cut is not the wisest strategy when determining the best, most efficient way to make sure your class "C" components are where they need to be, when then need to be there.

Lean manufacturing

Lean manufacturing treats work in progress (WIP) as a waste. In fact, every imperfection in the system creates the requirement to build work in progress in the system. So the WIP is also known as the mirror of wastes in the system.

On the other hand, many brand owners and buyers of class "C" components are moving towards a concept called VMI or vendor managed inventory. Basic principle of VMI is managing inventory by the vendor on the behalf of the buyer. By doing this, manufacturersers can focus on their core business.


Vendor-managed inventory (VMI) systems are a proven technique for improving the efficiency of supply chain operations. VMI is made possible by the implementation of an electronic means of exchanging inventory information between the buyers and sellers of products. These electronic links eliminate many of the built-in delays associated with traditional ordering systems and enable the establishment of collaborative inventory management systems.

Experience has shown that improvements in these two areas can result in the elimination of between 20 percent and 30 percent of the previously required supply chain inventory. However, in order to achieve this level of success, it is critical for those companies that have not yet implemented VMI to follow a best practice approach.

Successful VMI programs take advantage of a key supply chain relationship that has been reaffirmed many times over. When trust, cooperation, and business integration among trading partners increase, the level of inventory in the pipeline can go down significantly. Assuming normal business conditions, this can be a direct, inverse relationship that leads to significant improvements to the bottom line for all participants.

Benefits for the buying organization:

Lower costs: Much of the inventory planning will be done by the supplier.

Less inventory: Better planning leads to lower safety stock levels.

Better fill rate: Fewer stockouts, resulting in better sales and higher customer satisfaction.

Benefits for the selling organization:

The implementation of VMI processes leads to a tighter relationship with buying organizations, making them less likely to switch to a competitor.

Reduced inventory: Increased supply chain visibility enables better inventory planning.

Reduced cost: VMI enables tighter integration of vendor needs and production planning, resulting in more stable production and fewer "rush" costly orders.

The most common process used to support VMI is EDI-based exchange of two X12 transaction sets: the “852 Product Activity Transaction” and the “855 Purchase Order Acknowledgement”.

Electronic Data Interchange (EDI)

Electronic Data Interchange (EDI) is a set of standards for structuring information that is to be electronically exchanged between and within businesses, organizations, government entities and other groups. The standards describe structures that emulate documents, for example purchase orders to automate purchasing. The term EDI is also used to refer to the implementation and operation of systems and processes for creating, transmitting, and receiving EDI documents.

852 Product Activity Transaction

A warehouse distributor who advises a trading partner of inventory, sales, and other product activity information can use the Product Activity Data Transaction (852) set. Product activity data enables a trading partner to plan and ship, or propose inventory replenishment quantities, for distribution centers, warehouses, or retail outlets.

Each pair of trading partners should determine the frequency of data transmission. Data should be transmitted at least once per planned replenishment cycle, although more frequent data transmission is worthwhile. The balance of data transmission and processing costs must be balanced with the benefit of more frequent data.

Similarly, trading partners should determine whether all part numbers should be included in each transmission or only those with activity. For instance, a monthly transmission could include on-hand balances for each product while weekly transmissions would include only those products having sales, returns, or inventory adjustment activity. The transaction set is constructed to allow up to 200 reporting locations to be included in each transmission, and up to 999,999 products.

This guideline recommends minimizing the amount of data being transmitted to satisfy requirements for trading partner automatic replenishment of inventories. After the trading partner processes the data, the receiver of this transaction set would send a purchase order acknowledgment to the sender. The purchase order acknowledgment would include purchase order numbers being assigned for each reporting location, the date the order was processed, and the items and quantities being on order.

855 Purchase Order Acknowledgement

The electronic purchase order acknowledgement will typically contain exception-only information provided by the supplier about the customer’s purchase order, such as:

A part ordered has been superseded, and the superseding part is being shipped

A part ordered is obsolete, and cannot be provided

A quantity ordered is being changed to match minimum or multiple quantities offered by the supplier

A part offered will be shipped from a special distribution point, and won’t be included with the regular shipment

This information referenced on the purchase order acknowledgment is currently included on the shipment packing slip. However, when the distributor does not know the information until the shipment is received, confusion occurs during the receiving function. Because the supplier knows of these exceptions when the customer’s order is first processed, the exceptions can be electronically transmitted to the customer in advance of shipment receipt. In that way exceptions are greatly reduced:

Unexpected, superseding parts received are known in advance

Other actions can be promptly taken to find obsolete parts

Unexpected quantities are known in advance

Multiple shipment receipts can be planned

The distributor would likely integrate the purchase order acknowledgment into his purchasing system, and allow an audit modification of the original purchase order. Therefore, receiving operations continue unchanged while costly exceptions decrease dramatically.


On a daily basis, the retailer organization calculates sales and inventory data for each item and forwards this information to the appropriate suppliers using the 852 Product Activity Data transaction. Upcoming promotional plans can also be forwarded within these electronic documents. Software on the manufacturer’s end calculates the level of retailer inventory required to support the current level of sales activity and planned promotions. The manufacturer’s system creates the corresponding purchase order and sends an 855 Purchase Order Acknowledgment back to the retailer. The retailer feeds this information into its system as if it were an internally generated purchase order. The entire cycle can take less than one day, compared to four to six days under the old system.

Because this electronic exchange of product information enables the entire process to move much faster than the old paper-based system it replaced,  significant cost savings can be achieved due to reduced supply chain inventory levels. The manufacturer needs less safety stock inventory, and  is able to implement better production scheduling to match real demand and, therefore, carry fewer inventories.

VMI can directly impact the bottom line by reducing inventory levels, but it also improves top-line revenue by elimination of stockouts, which cause customer dissatisfaction in addition to the lost sales opportunity. Helping to drive the top line is often more exciting to top management than cost reduction and assists in making the supply chain function a more equal partner in running the business.

Although VMI or vendor managed inventory have the term "managing the inventory" it does not necessarily mean that vendor should have a huge inventory. Having a front-end working in the VMI model and the back-end of the business working with lean manufacturing makes a powerful combination. Vendors order goods when they want it in small frequent batches. Manufacturers do their manufacturing when they receive the order in small batches with a very short lead-time.

Isn’t this the ultimate lean manufacturing system?

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