Vendor-Managed Inventory (VMI) is thoroughly tried in North America and Europe as one of the best ways to build transparency and visibility between a manufacturer and a supplier in the management of raw materials. Transferring this to China is not so easy.

The Bottom Line: Companies must consider three major issues: inventory ownership, location, and customs compliance. Each must be worked through before a successful supply program can be initiated. If these are not managed appropriately, neither side will see the traditional benefits of VMI.

You must keep an eye on the following three considerations:

To own inventory in China, a company has to be a legal entity there. For suppliers without a Chinese legal presence, VMI is simply not possible.

[u]The Takeaway:[/u] Before establishing a VMI relationship, check if the legal status of your supplier is as a legal entity. If your supplier is not a legal entity, help suppliers navigate the Chinese system by using your influence to help establish presence for them.

In China, VMI becomes much easier if you locate the supply network within one of the 15 free-trade zones, which offer tax and process efficiencies for both parties.

[u]The Takeaway:[/u] Locate free-trade zones and areas that minimize the handling and logistics for the materials. Logistics infrastructure is being upgraded, but will remain significantly complex.

Up until recently, the lengthy time for customs compliance negated the efficiency of a VMI program; now some brand owners are managing customs compliance electronically using Electronic Data Interchange (EDI). The rules are complicated and vary at three levels: national, provincial, and city. If the operation is located within one of the free-trade zones, it becomes much easier.

[u]The Takeaway:[/u] Staff a full-time, senior-level relationship manager to work with customs authorities.

Conclusion: Working with suppliers that have presence, and are well-versed on how to navigate these three considerations, is best if pursuing a VMI relationship. If you cannot navigate through these three issues, the barriers defeat the benefits of VMI.

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