VMI gains elusive for some, but not for Volvo Powertrain

Everyone's heard that Web-based supplier collaboration is the next step for cutting inventories across tiers. Trouble is, achieving the necessary trust is easier said than done, according to some experts. But even if collaborative initiatives such as vendor managed inventory (VMI) aren't always successful, companies such as Volvo Powertrain, Göteborg, Sweden, have made gains.

Volvo Powertrain, which makes heavy-duty diesel engines, cut inventory by half within 10 months of implementing a collaborative supply chain management system from PipeChain. According to Lena Palm Sandin, manager of IT and logistics development at Volvo Powertrain, Volvo's aim with the VMI project was to reduce stock levels and lead times, while increasing the service level.

Fifty suppliers were involved in the project, which began in December 2002. The supplier group represents 80 percent of the inventory value for Volvo's engines and transmissions. In 10 months, Volvo was able to cut its average stock from 8,000 pieces to 4,000 pieces. Sandin notes that the service level with the suppliers also has improved, and she expects to gain further improvements in stock reduction and service levels as Volvo fine-tunes the system.

Under the Volvo initiative, suppliers technically don't own the inventory—as is the case in some VMI projects—but they do take responsibility for replenishment orders. Via EDI and the Internet, the suppliers also have a window into actual stock levels and point-of-sale data coming from Volvo Powertrain customers.

According to PipeChain, it was the visibility provided by the system that gave Volvo managers confidence that they could reduce inventory without risking outages. "If you take a harsh look at what we actually did, we contributed a tool that enabled Volvo to be comfortable enough to reduce inventory with its suppliers," says Anders Ever, a VP for PipeChain. "Before PipeChain, there was a lack of comfort by Volvo managers and their suppliers. They were not able to engage in inventory reduction of this magnitude without that comfort."

Not all companies using VMI programs have been as successful. According to one analyst, trust and cooperation between a company and its suppliers remain critical elements to lowering inventory.

"The software doesn't compensate you for perceived risk and contract obligations," says Tom Ryan, a VP with Boston-based analyst firm Aberdeen Group. "The technology allows companies to audit mutual compliance, but it doesn't make them partners or make them cooperative."

Ryan acknowledges VMI can work at times, but in some instances in the consumer goods industry, he's seen VMI projects abandoned. "A lot of the VMI initiatives at large retailers [indicated] suppliers were no better at managing inventory than they were," notes Ryan. "So some of the retailers brought their inventory back in."