Inventory Reduction


During the last decades, an increasing level of globalization is faced by world that has derived rapid developments in technology. There is a fierce competition within manufacturing and service industries which has put lot of pressure on organization to improve operational efficiency as well as reducing cost along with continuing to improve service / product quality (Chan and Wu, 2002). Traditionally, the manufacturing organizations were focused towards purchasing materiel from the cheapest suppliers, which has now become insufficient. Business entities, nowadays, are focusing towards building collaborative partnerships with suppliers during the whole process of supply chain. Management of supply chain has become crucial for achieving organizational success. Today, organizations are facing challenges due to supply chain that has been turn into a completive aspect. The basis of competition has somewhat changed from brand to supply chain. In other words, business entities are facing competition in terms of effectiveness in supply chain management. Therefore, the ultimate success of corporate entity lies to the ability to integrate supply chain activities.

The market customers are increasingly placing greater demands on business enterprise to provide better quality products and services at competitive cost. It is important for corporate entities to secure cost and to use improved technology in the business to cope up with the competitive environment. In this regard, management of supply chain activities can be a way to fulfil customer requirement and to achieve competitive advantage (De Toni and Zamolo, 2005). The concept of developing effective relations between supply chain activities is called as Supply Chain Management. The topic has become significant for modern business management as it facilitates operational efficiency as well as profitability. The topic supply chain management has become increasingly crucial to supply goods and services to customers. The business entity is required to create relationships with, different stakeholder whether they are offering goods of services. However, supply chain is conceptualised in manufacturing units.

The effective allocation and utilization of resources play a crucial role in organizational excellence. The concept of effective management of resources to gain profits is applied to every organization. The organizations are aiming at improving supply chain management to make the operations more transparent and to identify visible demand pattern.The effectiveness of supply chain management is seen to rely on bullwhip effect as an expansion of orders from end-customers in which the order placed by the customers exceeds to the actual order quantity. The impact of bullwhip has shown unpredictable and unstable demand for supplier. On the other hand, it negatively impacts on demand forecast for suppliers. The bullwhip impact leads to poor customer’s services as well as high stock out and inventories control.  Many of researchers have argued that Vendor Managed Inventory (VMI) is an effective tool that helps in overcoming the bullwhip effect during supply chain process.

Vendor Managed inventory is the SCM technique that facilitates efficiency in whole supply chain process.  It has quite identified that the technology has been adopted simultaneity with other SCM element i.e. EDI (Electronic Data Interchange).  VMI is defined as the tool that involves suppliers in making decision related to supply chain. Sari (2007) defined VMI as a continuous replenishment program in which supplier itself takes decision for replenishing inventory. In other words, the technology is said as the alternative for the traditional order-based replacement. The tool has been using in manufacturing units to resolve the problems occurred during supply chain coordination. The technique focusing towards taking faster and accurate deliveries instead of putting more pressure supplier’s performance. The use of VMI process facilities suppliers with responsibility and authority to manage whole process of inventory replenish. Further, the suppliers are responsible for maintaining the inventory level up to maximum and minimum levels of customer’s inventory. However, the system relies on the information provided by costumers that allows suppliers to take inventory replacement decisions. The information provided by the customers is valuable and unique for each VMI agreement. The information includes inventory levels, sales information, order status, data forecasting, scheduling of production and delivery status. Many of researchers have identified that information sharing in supply chain is valuable that enable suppliers to make inventory decisions. The present study is focused towards identifying the Inventory Reduction through Vendor Managed Inventory (VMI), in this regard; the case of Celestica Thailand Company has been taken into consideration. The organization deals with electronic manufacturing.  Herein, the dissertation is focused towards explaining the concept of Vendor Managed Inventory. The existing concept of VMI has been investigated in respect to identify Inventory Reduction through VMI system.

1.1 Background to the research

Many of researchers have argued that Vendor managed inventory has increasingly becoming industrial strategy for managing stock level during the supply chain management process.  In other words, it can be seen as the profitable approach to stock management in which vendor manages the inventory in uncertain environments where the delivery time and lead time can be varied accordingly. The importance of VMI has been argued for improved supply chain performance. To a traditional approach VMI the specific quantities are delivered to consumers through using the channels of EDI. However, the strategically tool for coordinating supply chain models has been designed (Yao, Evers and Dresner, 2007). In this regard many policies have been designed to coordinate the functions of delivery and customers demand. Many of industries such as automotive vehicle, E-commerce, merchandising, and construction have approached towards VMI techniques in order to manage their inventory and to overcome bullwhip impact. Nevertheless, in commodity sector, the approach had been proved failure as industry players have faced various problems. The concept is somewhat applicable to the industries that are having numerous manufacturing and supply activities. VMI has been seen enhancing supply chain performance for the organizations. Instead of, benefits of supply chain management the concept has not been implemented in as many organizations. However, they do not aware with the benefits of VMI in inventory reduction techniques. The organization has faced increased cost in executing inventory management functions. Being an electronic manufacturing company, Celestical is focused towards minimizing the risk of supply interruptions that can be approached through inventory management. Another way to achieve the objective is shortened the information lead times and to focus on reaction time of information sharing across the supply chain (Christopher, 2012). The information helps in making direct correlation between inventory levels, which is crucial to effective management of supply chain. However, from sustainability point of view, it can be said that VMI is an effective supply chain strategy which benefits all the parties including customers and suppliers in long term.

Supply Chain Management (SCM) is important aspect which has to be considered by every organization which is indulged into manufacturing and engineering work as it aims to get right selection of goods and services to customers effectively but due to change in consumer demand and natural disaster, Bullwhip effect is to be faced by companies which affect their management. VMI practice can help companies to minimize Bullwhip effect. Thus, Celestica Thailand can employ this method in supply management activities to get more benefits with excellent business performance. Celestica has developed e-business solution support for improving customer services which has helped company to improve information quality. VMI is also used by EDI (electronic data) which improve agility and supply network (Sherer, 2005). This engineering company is providing integrating services to customers by using in-bound VMI programs. Key integrated services provided by the company are Order managerial skills, Build to order, configure to order and Global order fulfilment. Such activities should be conducted by focusing on Six Sigma quality and continuous improvement. Celestica therefore manages VMI programs, import-export compliances so that tailored services and solutions can be provided. The purpose of conducting present study is to investigate the ways of inventory reduction through Vender inventory management. Further, the study is focused to access the VMI implications to inventory reduction of Celestica.

1.2 Research aim and objectives

The major purpose of this dissertation is - “Inventory reduction through Vendor Managed Inventory (VMI) – The Celestica Case

The objectives of this research are as below:

  • To understand the concept of Vendor managed inventory programs.
  • To identify the benefits of Vendor managed inventory programs to Electronic manufacturing companies.
  • To study the ways through which VMI can help to reduce the overall direct and indirect inventory costs in Celestica Thailand (Company) Ltd.
  • To analyse benefits of Vendor managed inventory programs for inventory reduction for Celestica Thailand (Company) Ltd.

Research questions

What are the benefits of Vendor managed inventory programs?
What is the order processing in Celestica Thailand (Company) Ltd to manage VMI?
What are the ways through which VMI can help to reduce the overall direct and indirect inventory costs in Celestica Thailand (Company) Ltd?

1.3 Research contribution

The study has crucial significance to the industry, academician and entrepreneurs as whole. In present scenario, number of companies are using VMI model to improve their supply chain system. However, most of them have not approached to the full capacity use of such model. The present study aims at identifying overall benefits of using VMI in supply chain management system. To a greater extend, present research is going to explain the use of VMI as an inventory reduction tool, that will helps managers to understand the benefits of VMI to such areas, so that operational excellence can be enhanced through using Vendor managed inventory in supply chain management. The companies will gain knowledge about the importance of reducing inventory through VMI. The present study is focused towards identifying the ways through which VMI can help to reduce the overall direct and indirect inventory costs in Celestica Thailand. Approaching to the findings of present study to current study, the management of company will have new ideas to reduce inventory cost that will be beneficial to achieve operational efficiency. To the other hand, the study herein, contributes to the academic sectors as many of scholars will be benefited with the finding of present study. The finding of this investigation will help scholars and academicians to identify the role of effective supply chain management for gaining competitive advantages. The key contribution of present study to electronic companies is how they can use VMI software to reduce the inventory in the business so that the cost can be reduced. Further, the investigation also approaches to help other industries as well as organization for the use of VMI that would help them to have a clear understanding of VMI programme for inventory reduction.

1.4 Structure of the dissertation

The present dissertation will be completed in a systematic manner. The study is comprises for six major sections that are explained below:

Chapter 1: Introduction:  Introduction is the first chapter of dissertation that provides a brief explanation of research topic. This is the chapter in which the background of study is created  and the section describes the aim and objectives of conducting research. It explains the need of present study and its potential significance.

Chapter 2: Literature Review: Literature is the most crucial part of dissertation that provides opportunities to go through investigations of other authors in the similar research topic. For, the present study, the literature review shows the meaning of supply chain management and it covers the importance of V ender Inventory Management. It also investigates the benefits of VMI for inventory reduction.

Chapter 3: Case Study: It is the third chapter of dissertation that deals with the analyzation of certain topics, principles, thesis, etc.

Chapter 4: Research Methodology: The chapter is second crucial part of research study that defines the flow of study. It approaches to the plan for conducting present study.  This can be called as blue print of research that present the research design, type of research, data collection method, analysis techniques etc. An in- depth investigation is employed to find out the relevant and valid outcomes.

Chapter 5: Data Analysis: Data analysis chapter presents the methods applied to analysis the data collected from 50 employees of Celestial.

Chapter 6: Summary and Findings: The findings based on primary and secondary study are summarised in this chapter. The finding of study are presented to portray how Celestica Company can use existing VMI approach to reduce inventory

Chapter 7: Conclusion

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I.5 Chapter Summary

The chapter herewith deals with a holistic view of the background to current dissertation and presents the aim, objectives and contributions of research.  Further, it presents the structure that is followed to complete the study.


The literature review presents a critical evaluation of researches that are conducted by authors in the field of inventory management, which helps in reaching the objectives of study. Various areas related to the research topic, have been bestowed in this section. The purpose of study is to gain sufficient knowledge in the field of inventory reduction through Vendor Managed Inventory (VMI). Therefore, below literature review represents the finding of the related topics of research.

2.1 Supply Chain Management

Supply chain management (SCM) is the foremost concept of operations management that is based on two Ideas. The first is that every product should reach to the end user and second is effective management of operations. Supply chain management refers to an active management of supply chain activities that can lead to maximising customer value.

“Supply chain management is defined as the set of approaches used for making effective integration of suppliers manufactures, warehouse, and stores for provide the products at the right quantities, to the right locations, and at the right time and to minimize system cost.”

SCM is used to achieve sustainable competitive advantage (Mishra and Raghu Nathan, 2004) Using such tool the manufacturing organization can effectively manage their productions, warehouse, and stores, so that final product can be distributed to the end user at the right quantities, to the right locations, and at the right time. However, it will lead to cost efficiency for business entity while achieving higher level of customer satisfaction.

The existing business environment has changed remarkably in the recent years. Today's corporate environment has become more competitive so an organisation dealing in same field needs to gain competitive advantages. Core competencies are related to reducing the cost but it is also referred to as the distinguished offering from rivals. Organizations have to focus on best outcomes from manufacturing and supply process (Disney, Potter, 2003). Supply chain management has enabled organizations to rethink on improving operational process and restructuring the whole supply process to gain a competitive advantage. The use of supply chain management has enabled the corporate entity to develop a unique image in current competitive market. SCM strategies are useful for companies in choosing the right partners, resources and work force that are related to the strategic decision. It also helps in enhancing the market positioning for a corporate entity.

Organisations can develop core competencies in niches and specialization areas with the help of SCM tools (Tyan and Wee, 2003). They have said that organizations need to look at the big picture of the whole process of supply. Further, it is essential to figure out the process that can reduce, eliminate the wastage of resources in supply of goods and services. SCM also provides value advantages to corporate entities rather than offering services and products to customers.

2.1.1 Importance of effective supply chain

Supply chain management affects the success of an organization (Cheung and Lee, 2002). At the time of purchasing goods and services from the suppliers, there can be seen a complete transaction between buyer and the providers of products and services. In such case, buyers gain something in return of monetary value. In some cases, it can be seen that suppliers or manufacturers deliver the products directly to the consumers. It’s a fact that there are many steps that are involved in delivering a product to an ultimate user (Kuk, 2004). However, before gaining knowledge about supply chain management and its importance, it is crucial to understand various components that are essential in supplying products and services to customers. Supply chain management is a combination of two basic ideas (Angulo, Nachtman, 2004). The first idea says that the product needs to be delivered to the end user or it has to be delivered at the destination from where it reaches the customer conveniently. Organisations have to put cumulative efforts so that the products can be delivered to the finest destination of customers. The process of providing products to the customers in a more convenient way is called as supply chain. The second idea is that the organisations pay attention towards the events that are happening within business. On the other hand, they do not focus towards the indispensable components of supply chain (Yao and Dresner, 2008), as a result it puts negative impact on the minds of customers and they think that market is not treating them well.

It is important to streamline the business operations and the supply chain so that customers can be provided with satisfactory products at their preferred time and place. Moreover, it also helps in developing involvement of business entities in their operational functions. Effective supply chain management is important for achieving operational efficiency within the organization (Pohlen and Goldsby 2003). A specific technique is used to provide customer satisfaction and also which helps in developing quality of operations. There are various reasons due to which supply chain management has become critical part of operational success. The use of supply chain management is important in boosting the customer service and enables the business organisation in providing right product at the right place. Although, it makes sure that the projects are served in a sufficient quantity but it needs to put more efforts.  In addition to this, the products should be available in the location where customers can easily reach (Claassen, Van Weele, 2008). It is essential to optimise the supply chain in such a way that the customers can be given a quality after-sales support also.

The tools of SCM play a significant role when it comes to improve the key areas related to production and supply. Simultaneously it helps in reducing the wastage of resources and effective management of large fixed assets such as plants, storehouse and transportation vehicles, which are mostly used in the supply chain. It has been revealed that expediting the delivery of products can increase the cash flow of organization; hence, organization can gain more profits (Sari, 2007). The importance of supply chain management is crucial in supplying of day-to-day products. Customers are the people who are highly benefited because of using supply chain management. However, they are considered as the important part of chain but they are the elements on which the management of chain is based. In case the product reaches them at a specific time, they gradually tend to be more satisfied or vice-versa.

2.2 Tools for Effective Supply Chain and Inventory Management

2.2.1 Overview of JIT

JIT is termed as Just in time manufacturing that is used for effective supply chain management. Use of JIT enables manufacturing organisations to produce quality products at the exact time as required. JIT manufacturing keeps the stock holding cost at minimum level (De Toni and Zamolo 2005). It helps in removing waste from production process and ensuring right quantity of products are produced with improved quality; with zero inventory and zero lead-time.

2.2.2 Materials Requirements Planning (MRP)

Material requirements planning is a kind of manufacturing planning in which manufacturing units schedule the level of inventory and control the cost incurred in manufacturing processes. Nowadays, organizations are using software for MRP, which has three objectives that are explained as under:
To ensure that sufficient raw material is available for production as well as ensuring the availability of products also in order to meet the customer's needs.
To maintain the lowest possible inventory of raw material and finished products in warehouses
To conduct a planning for manufacturing activities and identifying scheduling activities (Ellis, 2003).

2.2.3 Electronic Data Interchange (EDI)

Electronic Data Interchange (EDI) is the technology that helps in conducting supply chain operations. EDI is a kind of data intermission system using which information related to manufacturing process can be stored and used in further stages.
The above techniques are related to the inventory management, which is the foremost function of manufacturing organizations. These tools will be beneficial for organizations in creating invoices and purchase orders, generate receipts and control inventory-related accounting. Inventory management is a key element of effective supply chain management. SCM leads to cost savings, largely through reductions in inventory (Kirriemuir and McFarlane 2004). Effective inventory management is at the core of supply chain management excellence. The specific tools are important to provide competitive advantages to business entities. However, implementation of inventory management techniques provides various benefits to organizations in the way of increasing profits, improving efficiency, reducing wastage of material, cost reduction and so on. Use of SCM tools and techniques enables corporate entities in diagnosing the supply-based problems and in effective management of resources.

2.3 Vendor Managed Inventory Program (VMI)

Vendor managed inventory (VMI) is an effective strategy in which the supplier of products and services is entirely accountable for the supply. In other words, it is a business model in which vendor creates an order instead of distributors who are supported by the information acquired by them. The effective supply of products and services can be maintained through proper planning and coordination between the manufacturer and supplier (Dong and Xu 2002). In this model, the buyer of products provides certain information that is related to product delivery to a vendor, who supplies the products and services. The supplier usually takes responsibility for providing agreed goods at convenient locations. However, third-party logistics can be involved so as to ensure sufficient inventory being stored. This helps the supplier in maintaining a balance between the supply and demand.

It is considered as a mighty tool for creating a lean supply chain, however, it supports organizations in eliminating the problems that are related to forecasting and scheduling of supply processes. It has also been revealed that manufacturer decides when to replenish the inventory (Disney and Towill 2003). In this particular technique, suppliers use automatic electronic messages. This method is mostly used by the industries like, departmental stores, apparels and automotive, paper and plastic manufacturing. Further it has been identified that the major objective of using VMI method is to decrease inventory and improve customer service as well as gross margin (Tyan and Wee 2003).

2.3.1 Use of VMI

VMI is the win-win cooperation strategy that can be used by buyers and suppliers in which the inventory management is improved (Mishra and Raghunathan, 2004).  Using this method organization can reduce the cost of inventory that will enable them to offer products at reasonable prices. It can be seen as the new inventory management thought process that is used for enhancing the coordination between supply chain and it is also used for improving economic process of supply. It was further indicated that VMI is an important strategy that is useful for big entities (Yao and Dresner, 2008). However, the use of VMI tool can improve supply chain performance and help in establishing coordination between supply chain firms. It was further constituted VMI supply chain model is based upon buyer-driven supply chain relation (Dong and Xu, 2002). In the particular study, the effects of VMI on supply channel have been presented. Moreover, it is further explained that VMI reduces total costs of the channel system in short run but due to certain situation, it leads to decrease the purchasing price and supplier’s profits (Yao and Dresner, 2008).  However, it has been identified that supplier’s profits can increase more than expectations in long run.

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2.4 Benefits of Vendor managed inventory (VMI) to Electronic manufacturing companies

The purpose behind using VMI is to achieve competitive advantage in the market. It is a kind of win-win situation for both consumers and suppliers. Suppliers can develop their own production plans and ordering schedule so that specific requirements of customers can be met (Claassen and Van Raaij, 2008). However, major benefits of using VMI technique are to stabilize the production level of organization and optimizing transportation and simultaneously the cost of administration and inventory can be decreased. Morover, the coordination between supply chain partners can be improved whilst reducing lead times.

2.4.1 VMI and Supply Chain Management

It has been revealed, that the additional benefits of VMI can also be seen from the point of view of supply chain system (Sari 2007). It improves the overall supply of product by preventing sub-optimization. As per the policies of traditional supply chain, consumers were the authorized people for deciding the time and amount of the replacement. At the time of taking such decisions they considered the actual inventory and operating cost. But, the supplier's transportation costs and production capacity was ignored in facilitating the sub optimal decisions within the organization. It has also been outlined that VMI enable vendors to exchange the information with customers continuously (Monczka amd Handfield, 2008). In addition to that, it has been found that VMI has significant benefits for both the parties customers and suppliers (Sahay, 2003).

The vendors can get the timely and undistorted demand signal that will help in improving supplier services. Having, these kinds of inventory management programs suppliers can receive the refilling orders from distributors. While using VMI and its related programs, suppliers can get information of stock level through electronic data interchange and Internet. In addition to that, retailer can share the information related to purchasing and upcoming sales (Kuk, 2004). Better relations with market customers can be made that is essential for organizational growth. The suppliers can reduce the inventory levels and can improve customer’s services. Suppliers can be benefited with reduced inventories as well as their services can be improved (Chan and Wu, 2002). Overall supply chain management can be improved with the practices of VMI. It was found that the inventory level in the organization can be increased as in the VMI process retailer can monitor the inventory levels and can take effective decision over number of orders, delivery methods, and the supply time (Kirriemuirand McFarlane, 2004). In addition to that it was also discovered that VMI system enable organization reduce demand uncertainty allow vendors to maintain minimal inventory and production cost (Srivastava, 2007). The foremost benefit of organization of implementing VMI is to make effective balance between the conflicting performance measures of inventory holding cost and customer service.

2.4.2 VMI and Cost Reduction

The benefits of VMI have been described as a means to reduce the risk of demand amplification in supply chain process (Cheung and Lee, 2002). Further it has been outlined that the major benefits of VMI that are reduce costs, increase service and provide greater transparency in the supply chain (Kuk, 2004). It is also said that the suppliers are benefited with the implementation of VMI as they can easily optimize the production process and can meet demand of customers (Tyan and Wee, 2003). Forecasting for future demand for organizational products can be down.  It will lead to reduction in wastage of resources and will reduce the cost of inventory. It has been found that when VMI is implemented at a large scale or in multinational organization, the suppliers can be benefited with flexible replacement schemes (Dong and Xu, 2002). It will enable organization to better utilise their resources and reduce the wastage of scarce resources but simultaneously reduce the overall transportation cost. Another advantage of VMI with is the cost effectiveness in inventory management (Mishra and Raghunathan, 2004). It also helps in reducing uncertainty that enables the suppliers to promote stock safety. In addition to that management of supply chain can be improved along with reducing forecasting mistake. Further, in the study it has been estimated that the companies can reduce capital inventory, in addition to that VMI will require 20–30% of receivables as an expenditure (Darwish and Odah , 2010). It has been identified that VMI is used in big Department stores such as Wal-Mart, JCPenney and Dillard that have enabled management to improve inventory turnover by 20%to 25% (De Toni and Zamolo, 2005). Moreover, it has been identified that administration costs can also be reduced which are beneficial for customers (Mishra and Raghunathan, 2004). Use of VMI process enables the organizations to eliminate extensive materials' requirement planning and they can place the order of individual in broad purchase orders. Hence, they are not going to have any kind of administration cost that will affect the prices of products.

2.4.3 VMI and Customer Perspective Benefits

All these things are essential for the organization to provide a higher level of customer satisfaction and achieving their loyalty. In other words, manufacturing companies can gain proper information and can understand the potential demand from market.  It makes production and supply process easier as compared to potential competitors in the market (Pohlen and Goldsby, 2003). The fluctuations can be reduced as it enables the company to offer proactive services and better products to customers at reasonable prices. It also acts as a support system for the management to make better relations with the customers rather than focusing on selling (Cheung and Lee, 2002).

Angulo Nachtmann and Wallet (2004) reiterated the advantages of VMI include enhanced customer loyalty. The customer can be attracted towards the product of company by offering them a prompt delivery as well as a reasonable price. As per Pohlen and Goldsby  (2003) customers are also benefited with the use of VMI in the organization as they can get better quality product at their desired location in a stipulated time. In this way customers can be offered with better products at reasonable price. The study conducted by Kuk (2004) argued that lower inventory level can be obtained by customers meanwhile they can have reduced administration costs and risk of stock outs. In addition to that services can be improved that will provide direct benefits to the customers.

2.5 Order Fulfilment

Order management and fulfilment is considered to be core competencies for an organization’s supply chain management practices. In today’s competitive environment, order management and fulfilment have become a key issues for manufacturing companies. Similarly, it has also become a difficult task for the entity. It has been discovered that the companies who are operating in global environment are facing such issues more than the companies who are operating in domestic region (Sahay, 2003). The reasons behind such problems are explosions of order and delivery channels, increased complexness of global supply chain and improving expectations of consumers. The multinational manufacturers have faced such issues while having multiple distribution centres, lots of inventory locations and a diverse mix of suppliers (Srivastava, 2007). VMI enables corporate entities to standardize business processes more efficiently in order to get a better view of inventory levels and the order fulfilment process (Yao and Dresner, 2008). Using such technology the corporate entity can build a more efficient supply chain and can finally make improvements in customer satisfaction. It will helpful in gaining competitive environment.

Celestica's Vendor Managed Inventory (VMI) method is based on inventory, forecast.  Further, it can be used for exception-based alerting to proactively manage the process - of eliminating errors, managing inventory and fulfilment of orders at time. Moreover, VMI processes and inventory management controls operations whilst controlling operating cost through which new levels of efficiency and profitability can be achieved. VMI can be considered as an alternative for the traditional order based replenishment practice (Yao Evers and Dresner, 2007). However, it is less costly as compared to the traditional method. VMI emphasizes on solving replenishment through better supply chain coordination and provides the opportunities for managing customer’s entire replenishment process.

2.6 Inventory level management through VMI

The use of VMI enables manufacturer to manage the relative inventory requirement with regard to the variations in the order frequency. Under the engagement of VMI program supplier or manufacturers take the responsibility of managing the firm’s inventory. The process of managing inventory involves monitoring, planning and directly replenish inventory at warehousing (Monczka and Handfield, 2008). From the operational perspective, the suppliers of the products are liable for firm’s inventory control. The vendors of product normally collect the data related to organisation's stock level, sales of goods, demand of products etc. through electronic data interchanges from the firm; on the basis of such information production manager and vendors can decide the maximum and minimum limits of inventory that should be stocked at the production facility as well as in the warehouse at any point of time (Marquès and, 2010). The company decides when the stock is to be replenished along with its quantity etc. responding to orders placed by the company.

The VMI arrangement relies on the contract based on financial terms, inventory constraints and performance target so that firm as well suppliers can measure their liabilities for management of inventory. The manufacturing company uses VMI techniques to make possible improvements in material flows in the company (Lambert, 2008). Mostly the firm’s inventory is located at the production place, which is transported at the time of production. However, it increases the operational cost. Using VMI techniques production managers can plan for the required inventory and can place it, direct from the supplier's place which reduce the cost of operation and keep the inventory level low (Sherer, 2005). However, it can also be used to show requirement in a more transparent manner. The manufactures do not have to guess that what is the actual requirement or demand but they can directly know what product is to deliver. In most of the case organization triggers the supplier through purchase orders (Disney and Towill, 2003). In the VMI process, the manufacturer places the order at the time when the inventory is depleted by the end of the month and when the demand for the products increases. Further it was found that VMI helps in ensuring that the buyer has the required level of inventory by adjusting the demand and supply gaps (Christopher, 2012).

2.6.1 Short order

Short order is a situation where the demand exceeds the supply for a shorter period (Srivastava, 2007). In case of high level of shortage it becomes difficult to manage the timely delivery of purchase order and as a result it can lead to poor service delivery. With an objective of executing the VMI and sloving the short order issues, the organization is obliged to provide suppliers with a few essential information such as demand forecast, firm inventory level, order rate etc. (Darwish and Odah, 2010).

2.7 VMI and Its Impact on Inventory Cost

VMI is also referred to as continuous replenishment or supplier-managed inventory. The technique is mostly used by organizations working in retail industry. The suppliers have the responsibility of managing the customer's inventory and making effective decisions (Fawcett, Ellram, 2014). The decisions include the time and quantity of inventory that needs to be delivered to the customers. Moreover, it has been also found that organizations use the advanced information technology to access the demand from market (Sahay, 2003). They make direct contacts with customers to assess their requirements. The major component used in the VMI process is Electronic Data Interchange (EDI). Further, it has been defined that organizations use Internet technology to monitor the customer's demand and information related to the stock levels (Hugos, 2011). These technologies are less expensive for the company and helps in reducing the cost of material handling in supply process. The main reason of using such technology is to reduce cost in supplying process (Lambert, 2008). It was also revealed that this particular strategy is common within the retail industry and the VMI program has become more popular in the industry (Ellis, 2003). The cost effectiveness of VMI technique can be seen in Wal-Mart and P&G who have adopted the technique in their supply chain. VMI has significant impact on direct and indirect inventory cost within the organization.

2.7.1 VMI and Direct - Indirect Cost

VMI is helpful in resolving the issues related to direct materials cost (Kuk, 2004). In addition to that, effective allocation of resource can also be done in the organization, with the help of VMI process. It has been found that the process of VMI begins with identifying suppliers who have enough capabilities and willingness to execute the vendor managed inventory process (Darwish and Odah, 2010). It represents the entire supply chain system of an organization (Cheung and Lee, 2002). The organizations have to handle direct and indirect inventory between the process of production and supply of goods. There are two kinds of inventory cost, one is the inventory carrying costs and the other is the warehousing costs (Claassen and Vaan, 2008). The cost included in acquiring raw material is referred to as inventory carrying costs, while on the other hand the cost involved in facilitating the storage of finished goods at the warehouse before supplying then to customer place is called as warehousing cost. It is also said that the inventory cost includes costs that vary with the level of stored inventory (DTe oni and Zamolo, 2005). In case the quantity of finished goods that are stored is higher, then the cost of inventory handling also increases. In addition to that such cost include capital costs, inventory service costs, storage space costs and inventory risk costs etc (Marquès And, 2010). There is only one cost that can be reduced in instantly, and that is the warehousing costs. These expenses can be eliminated or must be increased in case the volume of warehousing installation changes (Barratt, 2004).

2.7.2 VMI and Warehousing Cost

It has been revealed that most of the warehousing cost doesn't change if there is no change in the inventory level (Fawcett, Ellram 2014). It tends to change in case the location changes. It has been said that indirect materials' automation has been integrated into the process of VMI that helps in identifying the cost associates in the supply of product as the place of customers desired (Kirriemuir and McFarlane, 2004).

It can be said that management needs to identify the indirect materials that are integrated with supply process. In most of the organizations, indirect material is an integrated combination of existing facility, leverage vending hardware, software, provider and maker process change, which meets tool supply requirements at lower cost without non-value added steps (Ellis, 2003). In this way the studies conducted by various authors are indicating that the VMI can be an effective tool for inventory reduction.

Thus, Celestica Thailand can employ VMI method in supply management activities to get more benefits with excellent business performance (Disney and Towill, 2003). Celestica has developed e-business solution support for improving customer services, which has helped company to improve information quality (Sherer, 2005). VMI is also used by EDI (electronic data), which improves agility and supply network. This engineering company is providing integrated services to customers by using in-bound VMI programs. Some of the key integrated services provided by the company are Order managerial skills, Build to order, configuring to order and Global order fulfilment. Such activities should be conducted by focusing on Six Sigma quality and continuous improvement. Celestica therefore manages VMI programs, import export compliances so that tailored services and solutions can be provided.

2.8 Literature gap

The literature review has identified that various studies have been conducted on using VMI as a cost effective tool but there was no evidence found with respect to actual reduction of inventory through Vendor Managed Inventory (VMI) Program. Thus, it can be said as a research gap. The present research aims at analysing reduction of inventory through Vendor Managed Inventory especially for electronic manufacturing companies. Various authors have found that VMI is an effective strategy in which the supplier of products and services is totally accountable for effectual supply and suppliers can develop their own production plans and ordering schedule. It has been termed as a useful tool for increasing production level and optimizing transportation.

2.9 Conclusion

In order to serve the purpose of research, the use of VMI for reduction of inventory is to be identified. The aim of conducting present research is to fill the research gap and to identify the level of reduction in inventory through using Vendor Managed Inventory program. The present section includes the findings of different authors in respect to the present topic.  It explains how a business entity can reduce direct and indirect cost of ordering process whiling using VMI techniques. The concept of Vendor Managed Inventory has been defined along with explaining its scope. As a benefit, vendor can manage to oversee distributors’ inventory levels.  It supports the vendor in cost cutting and rendering the products and services at lower and more competitive prices.  In addition to that, the importance of effective supply chain management has been described in the section, which has been pretested by various authors in their respective studies. The use of Vendor Managed Inventory in present scenario and its scope have been delineated in this literature review. Additional methods of reducing direct and indirect inventory cost and implementation of VMI are conferred.


Celestica Thailand, EMS (Electronic manufacturing services) company is providing printed circuit assembly (PCA), box build and direct order fulfilment. The core services of company are supply chain management solutions, design services along with engineering services. The company needs to introduce effectiveness in management of supply chain. The most optimal way to improve supply chain management is implementation of vendor-managed inventory (VMI). The in-bound VMI programs can be useful in reducing manufacturing costs, reduction in inventory, increasing competitiveness and in meeting customer satisfaction.

The revenues of company have declined in the last few years. Moreover, the market share of company has also reduced significantly resulting in lower profits. The organization is deals in the electronic manufacturing service industry. In this corporate sector, the cost of manufacturing and supplying products is too high. The critical factors that needs to be focussed on is to lower the cost so that competitive advantage can be gained. The industry players select the location, which is suitable for cost effective manufacturing (Fawcett, Ellram and Ogden, 2014). However, the cheap labour cost and effective supply chain management can be the prime solution to improve the competitive edge. The company believes in reducing the cost of suppliers and developing the strategies that reduce the cost across the supply chain practices. Moreover, the supply chain and procurement officer of Celestica are committed to make effective operations by adopting cost effective techniques. Organization uses VMI method in supply management activities to get more benefits with excellent business performance.

The major function of Electronic manufacturing services (EMS) constancies is to design, assemble, manufacture and check electronic components. Celestica Thailand is on the way to retain ownership of product designs along with brand names. The total sales of Celestica has witnessed decreasing by 6.8%; on the other hand market share of company has also been reduced from past decades. Customer operational flow has been decreased to a significant level. However, the profits of organization were increased in 2008 that time company has reduced employees and fellow subsidiary. Cost reduction is the crucial factor for electronics manufacturing service industry, that is considered as the biggest challenge. In order to reduce the cost of inventory and production cost the organizations move towards high-volume manufacturing to china. Another reason for approaching to these places is the availability of cheap labour cost and optimal cost of supply chain that leads to enhance competitive advantage. The current supply chain management problem faced by Celestica Thailand is in regard with purchasing electronic component and supply downstream OEM along with /Distributor with electronic product.

It was found that Celestica has developed e-business solution support for improving customer services which has helped the company to improve information quality (Sherer, 2005). VMI is also used by EDI (electronic data), which improve agility and supply network. Some of the key integrated services provided by the company are Order managerial skills, Build to order, configure to order and Global order fulfilment. However, such activities should be conducted by focusing on Six Sigma quality and continuous improvement. Celestica therefore manages VMI programs and import-export compliances so that tailored services and solutions can be provided. The major aim of VMI is to reduce the inventory cost so that the overall cost associated with manufacturing and supply of good can be reduced.  Using VMI, one can minimise the inventory holding cost hence, the cost of production will be reduced. The company is bound to an agreement which determines inventory levels, fill rates and costs. This arrangement can improve supply chain performance and it will support in reducing inventories and eliminating stock-out situations.


4.1 Research Goals and Design

The aim of present report is to identify the ways for inventory reduction through Vendor Managed Inventory (VMI). For this purpose, the case study of Celestica Company has been considered. A research design is proposed, through which some research questions are studied. The case study is an important part of the research as it helps the investigator to define research issues and approaches based on data collection and data analysis. The present study will be beneficial to Celestica Company to identify how to use VMI technologies; it also can be beneficial to various companies that are either new entrants in the market and also to the existing companies who want to improve their supply chain processes. The study into consideration, aims at identifying Inventory reduction through Vendor Managed Inventory within Celestica Thailand Company. Henceforth, the study proposed herewith will be based on descriptive design. An in- depth investigation will be employed to find out the relevant and valid outcomes. The descriptive design therefore, is said to be suitable for conducting the research work into consideration.

4.2 Research Questions

Purpose of research: “Inventory reduction through Vendor Managed Inventory (VMI) – The Celestica Case”

The research questions are:

The main aim of this research paper is to find out and analyse the ways of reducing inventories using VMI approach. To achieve this aim, the research will be conducted to answer the following questions:

  • What are the benefits of Vendor managed inventory programs?
  • What is the order processing in Celestica Thailand (Company) Ltd to manage VMI?
  • What are the ways through which VMI can help to reduce the overall direct and indirect inventory costs in Celestica Thailand (Company) Ltd?

4.3 Research Methodology

The research methodology includes steps which are used to provide answers to the research questions about inventory reduction through Vendor Managed Inventory (VMI) in the Celestica case. Positivism research philosophy will be employed as it does not interfere with subjects. Deductive approach is proposed to be applied in the research for this manuscript because significance of VMI to entire manufacturing and engineering industry will be reviewed and conclusions will be drawn particularly for Celestica. Furthermore, descriptive research design is to be formulated because it seeks to describe impact of different variables. By employing descriptive research, impact of VMI tool in Celestica will be identified. Moreover, the ways of reducing the cost of purchase through Vendor Managed Inventory technique will also be assessed. For analysing the data, both qualitative and quantitative analysis will be done through thematic analysis. Data will be collected form MIS/ERP System of Celestica on judgemental cum convenience basis. A total of 50 colleagues will also be approached through telephone and email because of limited time.

Following points shows the steps to conduct research:

STEP 1: The study is focused towards using existing approach to solve the problem in case; therefore, the first stage includes secondary study in which the findings of various authors will be presented.

STEP 2: The second stage will involve collecting data through 50 employees of Celestica.  Further, the data will be analysed through thematic analysis.

STEP 3: The finding of study will be presented in the further stage and will portray how Celestica Company can use existing VMI approach to reduce inventory.


Data analysis is the most crucial part of investigation because it helps in reaching to the objectives of study. The section herewith deals with analysing data that is collected through primary and secondary sources. The evidence of secondary data can be extracted from literature review. Primary data, on the other hand is gathered from employees of Celestica Company. Thematic analysis have been conducted on the collected data. Various themes have been designed to analyse the data so that objectives can be reached. The chapter here is important to reach the findings of the study therefore can be said as a crucial chapter.

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Theme 1: Concept of Vendor managed inventory programs

The theme herewith is based upon the secondary data evaluation that present the concept of Vendor managed inventory. Understanding the concept of vendor managed inventory is one of the most important aspect of this study. According to though investigation into secondary data, it was identified that VMI is an effective strategy in which the supplier of products and services is entirely accountable for the supply. In respect with the supply chain management process, Vendor managed inventory is a business model in which vendor creates an order instead of distributors. The secondary data has revealed that facts that buyers of products play an important role in providing information regarding to delivery that supports the supply chain management process of an organization. The tool has become crucial for supplier in maintaining a balance between the supply and demand. In addition, the tool has been identified as an important tool that supports lean supply chain. Nonetheless, organization supports business in  eliminating the problems regarding to forecast and schedule supply processes. Within secondary data, it has been revealed that manufacturers decide the time for replenishing the inventory while getting support from particular technique such as automatic electronic messages.  However, the concept of vendor managed inventory is mostly used by the industries like, departmental stores, apparels and automotive, paper and plastic manufacturing. Further, it has been identified that the major objective of using VMI method is to decrease inventory and improve customer service as well as gross margin.

Theme 2 : Vendor managed inventory programs and electronic manufacturing companies

The above theme is made on the basis of empirical data or secondary study that has been  conducted in literature review section. Various author have been contributed in the process of defining the concept of vendor managed inventory programs. This has been called as supply chain management technique that is used to improve the supply chain process. From the data, it has been identified that VMI technique involves suppliers in the process of decision making regarding supply of product and services. Using this technology supplies can themselves take decisions regarding replenishment of inventory as per the order processed by the customers. Within electronic manufacturing companies, clients put their orders for inventory. In order words, the orders placed by the customers and information provided by them is important to make replacement decisions. The above mentioned tool is identified as a technique that is helpful in resolving problems that are occurred during supply chain coordination. The technique  is said as the most important tool that facilitates management of the process of inventory replenish. The electronic manufacturing companies are facing problems of demand volatility that affects customer service as well as product revenues.

To the other hand sales fluctuation and uncertainness in ordering patterns and demand uncertainties has been seen volatile. The supplier dealing in EMC companies are attracted towards vendor managed inventory. VMI is helpful in dampening the peaks and valleys of production which allows smaller buffers of capacity and inventory. The tool can be used for forecasting demand of product in market so that wastage of resources can be reduced. The concept of vendor managed inventory in electronic manufacturing companies are shown in the aspect of improving supply chain management to that sales of product can be increased and financial position of business scan be improved. To the other hand, inventory reduction is an aim for approaching vendor managed inventory so that cost of inventory can be reduced. In the literature review section, it was identified that if companies implement vendor managed inventory at a large scale the benefits of flexible replacement schemes can be gathered. The  manufacturing units in electronic sector can better utilise their resources and can also reduce the wastage of scarce resources, hence overall inventory cost can be reduced. To the other hand, the time to hold inventory at warehouses can be identified through Vendor managed inventory.  In addition, VMI is the cost effective technique to manage inventory at the workplace. In respect with electronic manufacturing companies, use of VMI process is important to eliminate extensive materials' requirement planning.


  • Barratt, M., 2004. Understanding the meaning of collaboration in the supply chain. Supply Chain Management: an international journal.
  • Chan, L. K., and Wu, M. L., 2002. Quality function deployment: A literature review. European Journal of Operational Research.
  • Dong, Y. And  Xu, K. , 2002. A supply chain model of vendor managed inventory. Transportation Research Part E: Logistics and Transportation Review.
  • Ellis, R.,2003. Task-based language learning and teaching (Vol. 9). Oxford: Oxford University Press.
  • Fawcett, S. E., Ellram, L. M. And Ogden, J. A., 2014. Supply chain management: from vision to implementation. Pearson.
  • Hugos, M. H., 2011. Essentials of supply chain management (Vol. 62). John Wiley & Sons.
  • Kirriemuir, J.,  and McFarlane, A., 2004. Literature review in games and learning.
  • Kuk, G., 2004. Effectiveness of vendor-managed inventory in the electronics industry: determinants and outcomes. Information & Management.
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