8.4.1 How VMI works
The supplier tracks their customers’ product sales and inventory levels, sending goods only when stocks run low. The decision to supply is taken by the supplier, not the customer as is the case traditionally. The supplier takes this decision based on the ability of the current level of inventory to satisfy prevailing market demand, while factoring in the lead time to resupply. The smooth running of VMI depends on a sound business system. It also requires effective teamwork between the retailer and the manufacturer. In order for both parties to gain full benefit from the system, appropriate performance measures need to be used. The top priority measure is that of product availability at the retailer. It is in both parties’ interests to maximise product availability, avoiding lost sales in the short term and building customer buying habits in the long term. By emphasising the supplier’s responsibility for maximising product availability, VMI aims to achieve this with minimum inventories. In order to combine both of these apparently conflicting goals, it is necessary to have access to real-time demand at the customer.