Vendor Managed Inventory (VMI) for SMEs in emerging markets

Where information and visibility is lacking, inventory often takes the place,  all at a cost. Emerging market operations are a case and point. Even though Vendor Managed Inventory (VMI), also known as a continuous replenishment process, has been around since the 1980s, popularized by Wal-Mart and Proctor & Gamble, it has yet to take off with small and medium sized enterprises (SMEs). In emerging markets, as the mobile revolution takes hold, some real opportunities for suppliers and customers are opening up for VMI.

What is VMI?

In short, VMI is the process where the supplier generates the order and manages the inventory level for the customer. Prior to shipment, the supplier sends a delivery notice to the customer. VMI normally includes a combination of hardware, software and the input of people. The system is not tied to specific communication protocol and companies can use EDI (e.g. Wal-mart) ,XML, FTP or any other reliable communications methods.  Emerging methods, such as GSM mobile networks, are significantly reducing hardware cost (see Tanzania’s “SMS for Life” example).

VMI is a collaborative process where suppliers and customers share data and jointly agree on forecasts for each stock keeping unit (SKU). The replenishment of stock is automated and software is used to analyze and adjust changing demand patterns, goals and constraints. However, in emerging markets working with SMEs, it is unlikely that such an automated system is required and human intervention will likely suffice. Once the customer receives the product, the retailer handles payment through their account payable systems. Mobile money such as M-PESA also holds great potential as a payment system.

What are some of the challenges?

Technology – Hardware and software cost are major stumbling blocks when servicing SMEs . Current cost effective mobile technology is reducing costs, as demonstrated by m-health models, but cost remains a stumbling block for many SMEs. Poor system integration can also have a severe negative impact on the system.

Product returns – With SMEs there is the possibility that the system will be crippled by high product returns as cash flow and priorities shift.  Agreeing on inventory guidelines is just the first step of implementing the system. Making the model work can be more challenging.

Buy-in – Getting buy-in from SMEs can be a challenging undertaking and VMI can be viewed with suspicion to force them to buy certain products and SKUs.

Sales force resistance – The sales force makes money by selling product and this can be viewed as an attempted to reduce staff and cut cost.

Production challenges – Where products or SKUs are in short supply, the system can quickly break down and suffer from a credibility loss.

What are the advantages of VMI?

In developed markets the advantages of VMI for upstream (suppliers) and downstream members (customers or retailers) are well documented. The same holds true in emerging markets.  VMI holds some major cost savings benefits for both the supplier and customer. VMI can eliminate the need of a sales person to call on the outlets and reduce cost.

Customers are not always available and fulfillment costs are high due to low drop sizes. By improving visibility suppliers can provide timely and accurate deliveries and, in the process, provide better customer service. VMI can also improve customer retention and reduce stock outs, critical issues for any supplier in emerging markets where demand fluctuates based on cash flow. By closely evaluating the demand, suppliers will also tap into local market insight and get a better understanding of demand patterns.

Partnership and value added services

Building strong partnerships, either through non-profit organizations or Self Help Groups (SHGs), could play a crucial role in identifying retailers and making the model more scalable. Non-profit organizations can also play an important role in capability deployment and organizing micro-credit groups.

Partnering with other organizations that provide value added services such as micro-credit, mobile money and insurance, can share costs and risk with other partners.  VMI technology can also be used to sell other services such as mobile airtime and electricity vouchers. However, companies need to pilot VMI to ensure obstacles are overcome prior to roll-out.  With the mobile revolution in full swing, technology such as VMI, holds great potential for SMEs in emerging markets.

 

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