VMI in Apparel Manufacturing: Unheard off but Unattainable Too?

Prabir Jana, Prof. Prabir Banerjee and Dr. Alistair Knox

The article is based on annual research carried out at GMT Department, NIFT, India during
2001-02 sponsored by Creative Garments, India. This is part of doctoral research by Prabir
Jana at Nottingham Trent University, UK.

Introduction
Vendor-managed inventory (VMI) is sweeping through many areas of retail today as the next
step in supply chain management. Retailers, particularly those in commodity markets, see it as
essential technique to reduce inventory and apparel retailers are no exception either. In principle
VMI increase sales by avoiding out-of-stocks on in-demand products, and reduce losses from
overstocks of products that no longer sell. Although VMI is usually practiced between a
manufacturer or middleman and a retailer, it can also automate just-in-time delivery of supplies
and parts to the manufacturer by its suppliers [1]. VMI is even practiced in electronics industry
between final assemblers and part suppliers [2], however there is no evidence of VMI between
apparel manufacturers and raw material suppliers. This article explores the potential of VMI in
apparel manufacturing environment with supporting cases.

What is VMI?
Vendor Managed Inventory (VMI) is essentially a distribution channel operating system whereby
the inventory at the distributor/retailer (dist/ret) end is monitored and managed by the
manufacturer/vendor (mfg/vend) [3]. It includes several tactical activities including, determining
appropriate order quantities, managing proper product mixes, and configuring appropriate safety
stock levels. The rationale is that by pushing the decision-making responsibility further up the
supply chain, the manufacturer/vendor will be in a better position to support the objectives of the
entire integrated supply chain resulting in a sustainable competitive advantage. Through access
to the retailers’ sales data manufacturers can build to market demand, reacting faster to
changing needs. Interestingly, the technical support needed for VMI—once EDI is in place—is
actually fairly straightforward. It is the relationship that requires effort [4].

How is VMI different from traditional inventory management?

VMI is typically the opposite of the inventory management approach taken by most
organizations today. Currently, orders are pulled through the supply chain by each partner as
inventory levels reach "replenishment/re-order" points. This historic approach only serves to
incent channel partners to optimize their individual link in the supply chain at the expense of
sub-optimizing the overall supply chain. VMI, on the other hand, works in the reverse to link
partners together and to grant authority to the partner who is in the best position to make
inventory replenishment decisions. This entity is usually the mfg/vend partner given its
upstream position in the channel. The overall goal must be to support total value chain cost
minimization by pushing decision making on replenishment activities furthest up the supply
chain.
Why VMI?
To reduce/share cost of inventory
To reduce/share space requirement for inventory
To cut down response (procurement) time
To reduce/share uncertainty of type of merchandise requirement
To reduce/share uncertainty of quantity of merchandise requirement

Typical Benefits to manufacturer Typical Benefits to distributor/retailer

• Lower inventory investment (raw and
finished)
• Better scheduling and planning
• Better market information
• Closer customer ties and preferred status
• Fewer stock-outs with higher turnover
• Better market information
• More optimal product mixes
• Less inventory in channel (transfer costs)
• Lower administrative replenishment costs

Source: [1]

Some of the successful VMI implementation in different industry:

• At K-mart, customer service measures have gone form the high 80s to the high 90s.
Inventory turns on seasonal items have gone from 3 to between 10 and 11, and for the non-
seasonal items form 12-15 to 17-20.
• ACE Hardware, the large hardware cooperative, has seen fill rates rise 4% to 96% in the
past few years.
• Fred Meyer, the 131-unit chain of supercenters in the Pacific Northwest, reduced inventories
30% to 40%, while sales rose and service levels increased to 98%. This was due to a VMI
program implemented with two key food vendors.
• WalMart and P&G have had a VMI program together for over ten years to manage the
inventory and production of disposable diapers, with great success: turns doubled, WalMarts'
operating costs fell, and P&G's market share grew (because WalMart gave it preferred shelf
space).

VMI Application In Apparel Manufacturing

VMI can be looked as a step beyond Just in Time (JIT) in manufacturing scenario. In JIT
scenario vendor is supplying inventory to manufacturer Just in Time, whereas in VMI vendor is
maintaining (means already supplied before time) inventory at manufacturer’s warehouse. In
practice it is seen that JIT pushes the effects of unpredictability upstream in the supply chain [5].
While the manufacturer require to predict (forecast!) the demand for retailer, the consumable
vendor further up in the supply chain can simply calculate the requirement for manufacturer; this
is the key difference. The quality and quantity of merchandise in VMI are two very important
(often disguised) parameters for VMI application in manufacturing. Unlike retail scenario where
inventory has individual identity and is tracked by SKU, inventory at manufacturing level has two
identities; quality and quantity. While predicting inventory at manufacturing level involves getting
both quality and quantity right.
Some of the potential areas of VMI application in apparel manufacturing are procurement of the
consumables i.e. the raw material and accessories as identified below.

1. Fabrics
2. Sewing thread
3. Sewing needle
4. Zippers
5. Sewing machine spare parts

The following table summaries the potential of each of the above-identified areas against
different VMI parameters.

Analysing different areas with VMI parameters

Areas Cost Space Response Type of Quantity of
saving Saving (procurement) merchandise merchandise
time
Fabrics Substantial Substantial Substantial Uncertain Uncertain
Sewing Substantial Substantial Substantial Uncertain Certain??
thread
Zippers Substantial Substantial Substantial Certain Certain

Sewing Negligible Negligible Negligible Certain Uncertain

Needle
Spare Negligible Negligible Substantial Uncertain Uncertain
parts

For example practicing VMI between needle supplier and apparel manufacturer will have
negligible cost and space saving to the manufacturer. Also it was felt by the manufacturer that
current response time (procurement time) by needle vendor is fairly satisfactory and further
improvement will not result any substantial benefit. VMI is also about accurate prediction of
quality and quantity of merchandise by the vendor. While quality of merchandise (type of
needle) can be easily predicted (certain), quantity (of needle) is uncertain and needs
knowledgeable prediction by the needle vendor.

In retail environment key to VMI implementation is successful prediction of right quantity and
quality of merchandise. A sewing thread supplier can decide on type of thread and calculate
fairly accurately the quantity required based on fabric swatch and apparel sample. The question
is that in environments where prediction of right quality and quantity of merchandise is relatively
easy (just calculation, no uncertanity!) whether VMI application will result any further
advantages?

Taking VMI in retail environment as benchmark, the similarity and disparity analysis for above
five consumable supply environments were done. The comparative similarity or disparity will
suggest respective ease or difficulty of implementation.
 Areas Similarity with Retail Disparity with Retail environment
environment
Fabrics Like retail sales the actual
consumption (type & quantity)
pattern of fabric is difficult to predict
Sewing Like retail sales the quantity of Unlike retail sales the actual
thread sewing thread is difficult to predict consumption (type of sewing thread)
pattern of sewing thread can be
accurately predicted.
Zippers Unlike retail sales the consumption
(type & quantity) pattern of zipper can
be accurately predicted.
Sewing Like retail sales, companies those Unlike retail sales the consumption
Needle follow “break to replace” policy, (only type) pattern of sewing needle
sewing needle consumption (only can be accurately predicted if company
quantity) pattern also can’t be follow “fixed-life needle replacement”
predicted accurately. policy.
Spare Like retail sales can’t be predicted Unlike retail sales the consumption
parts with 100% accuracy, spare parts (only type) pattern of sewing machine
consumption (only quantity) pattern parts can be accurately predicted if
also can’t be predicted accurately company follow good preventive
for companies with “break to maintenance policy.
replace” policy.

VMI Case Studies in Apparel manufacturing in India

Case One:
One apparel Manufacturer exporter from Bangalore wanted to experiment VMI concept (not in
true sense using EDI) primarily for controlling sewing thread inventory. Sewing thread is a very
important item in apparel manufacturing. The demand pattern (based on production schedule)
was shared with thread manufacturer and mandate was to supply right quality and quantity of
thread in right time. Thread supplier in consultation with apparel manufacturer calculated actual
quantity of thread. Before implementation of the concept manufacturer used to calculate and
order total quantity of thread and any surplus or shortage was headache of manufacturer. In the
new concept the onus of surplus or shortage totally went to thread supplier. Somehow thread
quantity calculation was never found to be accurate (with best of effort from both parties),
resulting thread supplier has to bear the cost of surplus thread. Barring some standard colour
like white or black, thread is perishable item so thread manufacturer withdraw from the
arrangement. The apparel manufacturer went on to have a risk sharing agreement with another
thread supplier and continued to work on the concept. In the new risk sharing agreement the
cost of dispute/surplus quantity of thread is being shared by both thread supplier and apparel
manufacturer.
Case Two:
One apparel manufacturer in NCR (Northern Capital Region) have an JIT (Just In Time) delivery
arrangement with a thread supplier. Under this arrangement the manufacturer block certain
quantity of thread with the thread supplier. But thread inventory is maintained in thread
supplier’s premises (instead of apparel manufacturer’s premises) and delivered Just-in-time
when required by manufacturer. The blocking of quantity is valid for certain period only and
beyond that the thread supplier is free to sell the thread to other manufacturer. This
arrangement is made possible only because geographical proximity of both guaranteeing
delivery within 8 hours. By this improvised arrangement
[1] Thread supplier avoided complicated reverse entry of goods in case of surplus, if aroused.
[2] Manufacturer avoided being left out with surplus stock, while being guaranteed against out of
stock
[3] Onus of calculating correct quantity is still remained with manufacturer

This arrangement was continuing when the study was conducted.

The Analysis
Other products like zipper and needle was also explored among numerous manufacturers.
Manufacturers felt those too insignificant to experiment. While needle and zipper supplier shown
interest in exploring the possibility. One manufacturer shown interest on VMI arrangement with
yarn and fabric supplier and the possibility is currently being discussed with the supplier. Gerber
Technology, the renowned CAD/CAM solution provider for the sewn products industry launched
a VMI programme in 1999 [6]. Under that pilot programme, Gerber’s service organization had
partnered with several customers who have large cutter installations to maintain a new parts
inventory at the customers site, resulting maximized customer “uptime” and reduced service
related costs by Gerber. While exploring similar arrangement with the sewing machine spare
parts supplier in India it was found that as exceptional cases similar practices were exercised
with few large apparel manufacturer for selected high priced machines. Two reasons were
identified as hindrance to make VMI as common practice. Firstly absence of large apparel
manufacturers, the driver of VMI implementation, and secondly absence of principles of
machine manufacturers. While the small scale apparel manufacturers can’t show their might to
the spare part suppliers, the machinery agents are least bothered about developing a long term
relation with the manufacturers.

Conclusion
According to Prof. Sunil Chopra VMI should only be implemented in cases where the mfg/vend
can forecast demand more accurately than the dist/ret. It is commonsense that accessories and
raw material supplier will be able to better forecast (sometimes just calculate) the demand for
apparel manufacturers than manufacturers do it for retailers. Fabric (basic raw material) and
sewing thread hold challenge due to unpredictability of demand, whereas needle, zipper,
machine spare parts etc. have fairly stereotyped demand pattern and can be easily
implemented. VMI presupposes EDI between the trading partners, and absence of EDI
infrastructure will make the “time gain” factor difficult to appreciate (and convert to cost
advantage) by partners. However, the emphasis is on the relationship, and the Software merely
automates the demand analysis. The sales tax and other procedural complexity may need to be
simplified for smooth flow of material and information between partners.
References:

[1] Fernando del Cid, Roger Gordon, Brian Kearns, Paul Lennick, and Andreas Sattleberger
under the supervision of Sunil Chopra, Professor of Operations Management, J. L. Kellogg
Graduate School of Management, Northwestern University.
[2] Duncan, R. Logistics: Trading Places. Engineering, Nov’96
[3] "State of a New Art." Manufacturing Systems (Master the Supply-Change Challenge
Supplement), pp.: 2-10, August 1995.
[4] G. BERTON LATAMORE, Customers, Suppliers Drawing Closer through VMI Relationships,
APICS -- The Performance Advantage, July 1999, Volume 12, No. 7
[5] Mallman, D.L., “The strategic role of suppliers in manufacturing strategies”, proceeding of the
2nd international symposium on logistics, Nottingham, 1995, pp.3-8.
[6] News Release, JIAM Show 1999, Gerber Technology