Vendor Managed Inventory

Vendor managed inventory (VMI) is a collaborative system whereby the vendor (supplier) is primarily responsible for managing the customer’s inventory (stock) and making all replenishment decisions. VMI in public healthcare leverages the interest and capability of an external party to assume responsibility for managing the availability of commodity inventory at a public-health facility. In some cases, this management responsibility can be expanded to inventory management support systems, related physical infrastructure, or other associated services.

VMI in the healthcare sector includes three parties: customer; custodian of inventory; and VMI partner.[1] See figure below.

The custodian of inventory is the agency that has physical possession of the inventory and is responsible for handling it. The central store or health-facility custodian receives, stores, and issues the inventory. Traditionally, when a custodian needs commodities, they place an order with their supplier (vendor). The customer is in complete control of the timing and size of the order being placed. Under VMI, the supplier is responsible for this activity.

The VMI supplier could be a true vendor of the commodities or a third-party supplier. A third-party would be considered for a VMI partner instead of a true vendor, because: (i) the true vendor is uninterested in the role; (ii) multiple vendors provide the commodities; and/or (iii) multiple third-party options are available that want to assume the responsibility for managing inventory.

The relationships between these parties are defined and supported by: (i) the information shared between the custodian and the VMI partner; (ii) how the information is shared; (iii) the responsibilities of each partner; and (iv) the agreed performance objectives.

To enable the VMI partner to more accurately determine inventory need or additional service requirements, inventory information must be shared. This includes stock on hand, the rate of consumption, and additional information about events that may affect future consumption, for example outreach programmes or changes in policy. Supplier performance should be monitored and objectively evaluated in relation to availability, maintaining minimum and maximum inventory levels, cost reductions and so on.

The immediate benefits expected from using VMI in public healthcare include:

Reduction in inventory levels and associated expenses (e.g. handling and storage costs);
Reduction in stock-outs, obsolete and/or outdated stock;
Reduction in transport and distribution costs;
Increase in availability at the custodian’s location, leading to improved healthcare consumption and related healthcare benefits.

These immediate benefits are primarily gains in efficiency from both the improved communication (the availability and timeliness of the information communicated) and improved decision-making by the VMI partner.

Contingent benefits of VMI in public healthcare include:

Custodians’ personnel can potentially focus on other priorities instead of inventory management responsibilities;
VMI partner can use improved access to information on requirements to optimise their operations and supply network, reducing costs and potentially prices.
Greater interdependency and cooperation between the VMI partner and custodian that make for continuous improvements.

VMI is a collaborative inventory management approach and trust is of paramount importance. It works best for items which have smooth, regular demand such as pharmaceuticals, health aids, medical devices, medical-surgical supplies, office supplies, and clothing. Demand is predictable and the custodian is able to estimate the stock level which is required. This allows the hospital to assess whether the supplier makes justified decisions for the replenishment quantities. In contrast, for products with fluctuating demand characteristics, the custodian may still want to control the inventory itself as it does not want to risk a stockout occurring.[2]

There are a number of reasons for the resistance to transferring full control to the supplier. As well as the perceived risk of stockouts, which can cause deterioration of patients or lead to mortality, the customer may be concerned that the supplier will hold higher stocks than necessary. Another issue is job redundancy, as previously the stock was managed by healthcare staff or pharmacists with inventory management responsibilities. It may also lead to supplier lock-in. These issues need to be considered when designing, implementing and operating a VMI approach in a healthcare context.

The key success factors for VMI are: collaboration, trust, honesty, clear goals, communication, accountability, strong relationships, and robust performance measures.[3]

VMI CASE STUDY EXAMPLES[4]

Example of a third-party VMI supplier, responsible for inventory management only:

In Zimbabwe, a truck-based inventory control system was initiated for several commodities (HIV test kits, contraceptives, and antiretrovirals). With this system, health facilities do not place orders. Instead, every review period, a team of trained logisticians from a third-party supplier travel with delivery trucks loaded with commodities from two central stores to 1600 health service facilities. At each facility, the team physically counts the stock levels, reconciles losses and adjustments, tops up to maximum stock levels, and recovers damaged or expired products. Data from the deliveries is entered into an electronic database. The system achieved 98% coverage and less than 5% stockouts.

Example of a third-party VMI supplier consortium responsible for inventory management and additional related activities:

In South Africa, in order to support the government’s commitment to fighting HIV and AIDS, a third-party supplier consortium was appointed to help manage the availability of HIV-related commodities at 10 provincial medical depots and 90 hospitals. Each provincial depot, in turn, supplied several facilities that offer HIV and AIDS services to the general population. Under this collaboration, the supplier assumed responsibility for: (i) collecting information on HIV-related commodity consumption, stock on hand, and losses and adjustments from depots; (ii) forecasting future consumption; (iii) aggregating consumption across depots and using leverage to obtain better prices from vendors; and (iv) placing orders to match consumption needs. Vendors for these various commodities delivered directly to the provincial depots or hospitals.

Example of a third-party VMI supplier responsible for providing technical assistance only:

In Tanzania, all health commodities in the public-sector are distributed through the Medical Stores Department (MSD). MSD comprises one central warehouse in Dar es Salaam and nine zonal warehouses. Health service facilities receive commodities through a requisition system directly from the zonal warehouses. Although the custodian is responsible for inventory management, a third-party supplier was appointed to provide technical assistance.

The supplier works exclusively on the HIV and AIDS commodities programme. Monitoring advisors, who are pharmacists, work in each of the zonal warehouses; they are a vital bridge between health facilities and zonal warehouses. They have access to a vehicle and a driver, and their primary function is to ensure that zonal warehouses receive accurate and timely orders for all HIV and AIDS commodities from health facilities. At the end of each review period, the advisors visit each facility that has not provided summary reports for HIV and AIDS commodities to ask why. If necessary, they will do on-the-spot training and a physical stock count, and complete a Report and Requisition Voucher which is sent to the respective zonal warehouse.

The advisors also ensure that orders are filled. If needed, they will deliver commodities from the zonal warehouses directly to facilities that offer HIV and AIDS services. They are also mandated to deliver emergency orders between review periods. They carry out physical counts at zonal warehouses and ensure that commodities are ordered from MSD’s central warehouse. This system has achieved 100% forced ordering for all HIV and AIDS commodities and has also created visibility of information that improves the accuracy of quantification and forecasting. The availability of on-the-spot training has quickly developed a competent workforce.

Examples of true VMI vendors, responsible for inventory management and additional related activities:

Laboratories serve their clients with tests and test results. Machines in laboratories vary from basic equipment to very sophisticated automated machines. Regular maintenance and servicing is needed to keep the machines operational and able to provide results of acceptable quality. For laboratories, reagents for tests and equipment maintenance are significant parts of the support needed from suppliers.

In Malawi, the true vendor supplies and maintains equipment, and provides reagents to the laboratory of the National Blood Transfusion Service. The laboratory runs tests on the equipment and provides information to the vendor on the usage of the machines; the vendor uses this information to resupply the reagents. The machines remain the property of the vendor, including the risks associated with ownership. If the machine breaks down, the vendor is responsible for back-up; if reagents expire, the vendor must bear the loss. The laboratory only pays for the tests completed, while the vendor undertakes maintenance and supplies reagents and other consumables.

In Nigeria, the National Agency for the Control of AIDS (NACA) received a grant to improve access to antiretroviral therapy and counselling & testing services for 36 states and the country’s federal capital territory. To achieve this, NACA had to ensure the availability of laboratory items for HIV and AIDS at healthcare facilities in the country. NACA selected and sub-contracted a number of local private vendors of laboratory equipment, reagents, and test kits to deliver these items directly to the health facilities.

Initially, the vendors visited facilities to assess the stock status for HIV and AIDS laboratory items and to set minimum stock levels, maximum stock levels, and review periods. At the end of each review period, the vendors visited each facility and determined the need for replenishment of types and quantities of test kits and reagents, which were then fulfilled. They also determined if any preventive maintenance services were required on the equipment. The vendors then prepared an invoice for the quantities supplied to each facility and sent the invoice to NACA for verification and payment.

[1] https://www.researchgate.net/publication/271761206

[2] https://www.researchgate.net/publication/301891301

[3] https://sutureexpress.com/case-vendor-managed-inventory-healthcare/

[4] https://www.researchgate.net/publication/301891301

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