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...Another way to deal with information distortion is to not only pass POS information directly to the supplier on a continuous basis, but also give the supplier the responsibility to maintain adequate inventory levels at the buyer's site. This is called Vendor-Managed Inventory, or VMI. This concept has also been called the Continuous Replenishment Program, or CRP...

...FMC Corporation is a large producer of soda ash, which it sells directly to certain customers or further refines into sodium bicarbonate (baking soda) for sale to others. After implementing a VMI program with one of its soda ash customers, FMC's knowledge of true soda ash demand and the smoother order flow to the VMI customer led to fewer shortages, fewer emergency shipments, and better rail car utilization. In addition, some VMI customers have seen a 37% drop in inventory levels since the start of the program, with no decrease in service. Other applications of VMI have produced similar gains, such as Wal-Mart and Procter & Gamble, and Barilla Pasta and its distributors.

Examine the figure below. Without VMI, the factory will see batched orders from the distributor that may not represent "true" demand. With VMI, the factory sees the actual inventory levels at the distributor in real time as well as sell-through data. Why is this data helpful? The factory can use this information to optimize production or shipping to various distributors...