VMI approach versus JIT approach
VMI stands for Vendor Managed Inventory. It is a business practice by which the buyer leaves full responsibilities of maintaining the inventory related to contractual supply for an agreed time period. It is a risk mitigation measure that transfers to the supplier all risks associated to inventory management. The competitive advantage of Vendor Managed Inventory is that it shifts a lot of the work away from the buyer to the supplier. This frees up resources for buyers, allowing them to focus on their core competencies.
From project management perspectives, the vender managed inventory can be properly used by applying Just In Time (JIT) inventory management principles. “JIT inventory management is an approach where purchasing strives to have no inventory, instead relying on suppliers to deliver goods as soon to the time they are needed as possible”1 JIT recommends that goods be supplied at the time when they are needed by the buyer, leaving inventory management discussion irrelevant for the buyer. Both JIT and VMI help keeping the risk on the suppliers but VMI may lead to increased cost payable by the buyer as a result of bargaining on inventory management. The specific advantage of JIT over VMI for the buyer is that it reduces the supplier bargaining power by the time of signing the contract, since all terms and conditions are planned in advance and incorporated in procurements documents. Success of JIT management rests on good procurements planning. Sections below provide tips on how buyers avoid inventory discussions with the supplier and so keeping all inventory management related risks to the supplier.
Milestones for proper project JIT inventory management
There are four major milestones of JIT inventory management as discussed below:
- JIT-driven procurement plans
During procurement planning, the procurement entity provides answers to the following questions:
- What is the right product or service that can help us meet our needs?
- What is the likelihood of the product or service being delivered in the desired time-frame?
- To which extent the product or service will meet expected quality?
- To which extent the vender or supplier is able to provide anticipated support when things go well or go wrong?
A JIT-driven procurement plan is the one that soundly assesses when goods will be needed and schedules their acquisition at that time. It takes into account all possible dependant activities, be it predecessor or successor activities; on the critical path or not. It is the interdependency between schedule activities that guides decision on when goods will be delivered.
- JIT Oriented Procurement Documents
Procurement documents such as Request for proposal (RFP) request for information (RFI) and request for quotations (RFQ) can be JIT oriented if they clearly state when goods are needed. JIT oriented procurement documents subordinate quality, scope and cost variables to time variables. Simply put, JIT oriented procurement documents provide a basis on which quality, scope and cost of goods to be supplied are tailored around the time period when they are needed.
- JIT-driven Bids’ Evaluation Process
A JIT-driven bids evaluation is the one that prioritizes time when goods must be supplied. The buyer mainstreams timeline during bids’ evaluation in such way that bids with low likelihood to meet schedule performance indicators are rejected. The short-listing process is done by steps and the first step consists of eliminating bids with low likelihood to meet schedule requirements established in the procurement documents.
- JIT Based Contract (JBC)
A good contract needs to have a clearly stated scope. The contract’s scope is made of three major components: (1) the needs of the buyer which must be satisfied by the vender throughout contract execution, (2) the duration of the contract (start and end) and (3) the cost/price of the contract. A JIT based contract is duration centered, and especially tailored to the time when goods are needed. A duration centered contract uses specific terms such as “shall” and “must” in clauses related to start time and other contract milestones to express the weight of deadline respect. The following check list helps to ensure that a contract is JIT based.
It is always recommended to avoid untimely inventory management in the goods’ purchasing process for three major reasons:
- You may not be ready to manage the supplied products or equipments
- You may not have enough space to keep the supplied equipments
- It would result in contract addendum, waste of time, poor quality of deliverables and financial loss.
Though JIT and VMI inventory management may not be a one size fits all solution for all inventory management challenges, they have to be considered and whenever possible tailor the contract on the buyer’s needs in terms of “when purchased products or equipments are needed” as opposed to “when purchased products are ready to be delivered”.
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