Demand Planning.Net: Are you Planning By Exception?
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are examples of a more passive collaboration between the customer and the supplier. Although some relationships in the past feature more active collaboration with a text-book style VMI, these are more an exception than the rule.

DemandPlanning.Net recommends its customers a modified VMI that incorporates a more rigorous focus on promotional planning, event modeling and sales-force oriented collaboration. Our implementation of promotions-focused VMI will help you drive better integration into your supply chain while achieving your customer's stated goals.

VMI – Vendor Managed Inventory

The Definition

Vendor Managed Inventory is a program in which:

  1. the supplier generates the customer’s order,
  2. based on shared information on customer demand and inventory and
  3. upon mutually agreed conditions

Tests of Collaboration

  1. Information Sharing – Yes!
  2. Visibility into the future – Maybe!

The supplier obtains the EDI transactions from the Customer for Sales, Shipments, and Inventory on a daily or weekly basis through the EDI 852. He may also get the sales forecasts through the EDI 830. But typically the supplier generates his own DC level replenishment forecast based on the historical data. Finally, the supplier's VMI analyst may try to incorporate some promotional intelligence into the forecast through discussions with the sales team and in rare cases, with the customer's replenishment analyst.

VMI Benefits

  • Person ordering, the VMI planner at the manufacturer, knows the products. This translates into a more efficient replenishment plan
  • VMI results in efficient ordering and delivery of new products. Because the DC level pipe-fill is known along with a reasoned guess on the replenishment volumes, VMI provides a more accurate forecast for a new product launch.

  • More visibility into Customer inventory levels provide better info to manage supply constraints.

  • Increased sales at retail due to better in-stock levels. This also results in Inventory Optimization for the customer. However, note that the better in-stock levels assume that forecast volatility is known through some sort of collaboration process or information-gathering mechanism. (See this as an issue below.)
    a. Improved DC In-Stock
    b. Improved Retail In-Stock

  • Reduced customer administrative costs, since the replenishment work is transferred to the supplier. This is purely a benefit to the customer, but many a times this acts as a major catalyst for the establishment of a VMI relationship.

VMI – The Issues

  • Long-term forecasts are still generated through the supplier’s crystal ball. Because the customer does not give much forecast guidance or intelligence on promotional or market events, unexpected retail or inventory volatility will hit in-stock levels.

  • Little collaboration on the forecast (very rarely)

  • Customer gives you the data and the inventory policy and the supplier does the rest!

  • The success of the program rests on the supplier’s creativity and initiative and a good internal consensus process with sales staff on the field.

How is Co-managed Inventory (CMI) different from VMI?

  • CMI is similar to VMI except the supplier manages the replenishment process and develops forecasts in the customer’s system. A key example of this process will be the supplier process adopted by Wal-mart as well as the JDA E3 process used by the Drug Chains like Eckerd, Rite-Aid and CVS.

  • Customer provides system access to the supplier

  • Supplier has visibility to POS at the store level, Store and DC inventory

  • Supplier reviews info and generates order in the customer's system

  • The key difference is that order placed by the supplier is still a recommendation and is not a firm order until approved by the customer. In a VMI process, the order generated by the supplier on the customer's behalf is a firm order to deliver product and bill the customer.

VMI and CMI - The Challenge

  • The traditional continuous replenishment process (CRP) activity does not truly generate a demand plan that can be integrated into the manufacturer’s Supply Chain for production planning purposes.

  • Too tactical and short-term oriented and typically focuses on the next two to four weeks.

  • More emphasis on order placement and replenishment based on near term activity

Although VMI and CMI are constrained by criticisms of short-term focused and being too tactical, in practice they have been very popular because of their low cost to implement. The key is to leverage the low-cost implementation while driving consensus and collaboration and bringing the focus on promotional planning and management.

If you would like to find out more details on our modified VMI model and implementation, please contact us.

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