Vendor managed inventory: enlightening benefits and negative effects of VMI for Ikea and its suppliers

Abstract: In 2000, Ikea formulated their direction for the new millennium. Their vision is to improve the everyday lives of the many people and in 2010 they have an objective to be the world's leading home furnishing company. This will be achieved by an increase in sale and reduced sales price. In order to reach these targets Ikea must focus on the supply chain's logistical efficiency. The company recognizes that the best way to cut logistical costs is to reduce stock in the supply chain. Vendor Managed Inventory (VMI) is an outstanding strategy to achieve this. VMI is a replenishment program where the supplier is given access to customer's inventory level and demand. The supplier is fully responsible of managing the customer's inventory levels and has the authority, and responsibility, to replenish the customer's stock. Today, Ikea is involved in 19 VMI relationships. The company's feeling is that by implementing VMI they have been able to increase the service level and decrease the supply chain's inventory level. However, they have not done any investigations to confirm this idea. Hence, the purpose of the thesis is to investigate the benefits, and negative effects, that are to be obtained by Ikea, and its suppliers, after an implementation of VMI. In order to fulfil the purpose of the thesis the authors have done a broad literature review concerning both economic evaluation methods and parameters that may be affected in a VMI relationship. Further, they have benchmarked against other companies that have realized economic evaluations of their VMI relationship. The results from these studies have been compared to the outcome of Ikea's VMI relationships with Bräntorp AB and Tibro Kontorsmöbler AB. The conclusion of the thesis is that Ikea's supply chain will profit from VMI. One of the major benefits is an increase in service level. Another benefit is an increase in productivity at the suppliers. The research also indicates that there is a risk of an increase in inventory levels at Ikea's distribution centers. However, this can be avoided if Ikea follows its routines and jointly with the supplier set maximum and minimum inventory levels.