According to the Cooperative Research Network, vendor-managed inventory (VMI), also called supplier-managed inventory, is when “suppliers carry inventory at their location for cooperative use; co-ops then receive their materials just when they need them through same- or next-day delivery.”

Goals and Objectives
The goals of vendor-managed inventory/sole sourcing are to reduce the cost of inventory and increase the overall efficiency of inventory management through optimizing current assets and future investments, leveraging knowledge and resources, enabling active participation by all stakeholders, and enabling new products and services. With this in mind, the adjacent diagram shows the relationship between the vendor and the utility for three purchasing options:   conventional, VMI and consignment. VMI provides benefits to a utility. As the diagram illustrates, material ownership is delayed until materials are taken out of inventory.

“The innovative aspect of VMI is the way it separates control from ownership, both of which usually transfer at the same time.  In VMI, the producer [vendor] receives continuous updates on a retailer’s [utilities] inventory level and replenishes it as needed, with the retailer [utility] taking ownership of the goods on delivery. This gives producers [vendor] better visibility of sales of their products, helping them anticipate demand and better plan supply. The retailers [utility] benefit because they no longer have to track inventory levels or place orders for products under a VMI program. They also save money because they usually need less inventory, sometimes as little as half of what they would otherwise keep in stock” (Supply Chains: A Manager’s Guide, Page 48).

A Model for Success
“More than three years ago, Central Rural Electric Cooperative created a partnership with Arkansas Electric [Cooperatives, Inc.] to take over the ownership and management of all CREC inventory and also to house a regional utility inventory on the CREC campus.  This operation has grown significantly and provides a very unique opportunity for the joint partnership to leverage buying power through this operation … It is important to note that this opportunity will also allow each organization to utilize this facility for inventory management of all products currently being used. Arkansas Electric uses the CREC warehouse as a regional facility.  This allows AECI to expand sales to other utilities, providing savings and revenue opportunities.”

Current Business Model Challenges
When considering the move from a traditional system to VMI, business process requirements change.  This section outlines some of the new process requirements when considering VMI.

Business Process Challenges and Requirements
In an effort to improve efficiencies and drive down costs, utilities often introduce new technologies. However, new technologies are often disruptive to the organization and thus are underutilized and do not meet the desired results. New technology requires additional training, new process mapping and procedures to effectively reach desired efficiency gains. 

Business Organization Challenges and Requirements
Utilities are steeped in tradition, hence the notion:  “We have always done it this way.” Utility procurement has changed little over the years. Year after year, utilities purchase material, stock material and disburse material. Little consideration has been given to improve the efficiency of the existing system. However, with rising costs, utilities are starting to look at ways to control, spread and even reduce costs. The following details business organizational challenges utilities face with regard to inventory management.   

Business Data Challenges and Requirements
Challenges associated with data processing include the data accuracy associated with data input. One of the main challenges will be the invoice timing and order fulfillment processes:  receive material, no invoice for received material, jobs being done, “do out” material taken out of stock, but not in system inventory.

Business Application Challenges and Requirements
Even with good planning and forecasting, utility operations are often stymied by manufacturer and distributor performance. Examples are stock-outs, low inventory levels and back orders. In addition, the traditional utility purchasing process is costly and time consuming.