What is vendor managed inventory (VMI)?

Vendor managed inventory (VMI) is an inventory management approach where vendors or suppliers oversee all the products in a retailer’s inventory. Vendor managed inventory is beneficial to companies because it takes some of the  responsibility away from the retailer, helping avoid stockouts and reduce purchasing costs, among other things.

The 3 factors that make a VMI system

Vendor managed inventory is characterized by three main factors that help distinguish this approach from other inventory management methods. The following are the qualities that make a VMI system what it is, and what set it apart from the rest of the crowd.

1. Vendor-controlled inventory management 

While most inventory management puts business owners (and their team) in control of product movement, a VMI system is one where inventory is vendor-controlled. What this means is, it’s the vendors who are paying close attention to where products are within the supply chain, and they’re the ones who keep an eye on when it’s time to place replenishment orders.

2. Vendor-controlled reordering and stock keeping 

Reordering and stock keeping are time-consuming responsibilities for businesses of all sizes. But for companies who use a VMI system, these tasks are vendor-controlled, which can free up several hours in the day. In this scenario, it’s the vendor’s job to take initiative with reorder points and to guarantee there’s enough (but not too much) stock on the shelves.

3. Business and vendor information sharing

Maintaining optimum inventory levels with a VMI system, it requires a great deal of information sharing between the business and their vendor. This typically looks like giving suppliers visibility into inventory counts at customer (or distributor) locations, and offering a look into customer demand to help solidify the vendor’s manufacturing planning.

Why do so many large businesses use VMI?

These days many large businesses use the advantages of vendor managed inventory in their business model to help reduce costs and to stop storing overstocked items. An effective VMI model offers serious supply chain optimization and takes away a lot of unnecessary stress, because it’s the vendors who are in charge of making sure customers have access to what they want, when they want it.

Benefits of vendor managed inventory

1. Better relationships with suppliers

At its core, the goal of a vendor managed inventory system is to create a mutually beneficial partnership between the supplier and the customer. This relationship not only fosters healthy collaboration, but it smoothly (and accurately) controls the availability of goods, as well as the flow of inventory items throughout the entire supply chain.

2. Less need for safety stock

With VMI, the need for safety stock is greatly reduced, because the supplier is the one responsible for managing replenishment lead times. When the supplier notices a customer is close to exhausting its inventory levels, they can very quickly prepare for replenishing, given that suppliers have more authority over their production schedule and distribution processes.

3. Less upfront supply chain management 

When it comes to VMI systems, the manufacturer or distributor assumes the role of inventory planning, and is similarly accountable for the customer’s inventory replenishment. For these reasons, the business itself has much less to do with the SCM, and instead trusts the manufacturer to meet all of their sourcing, reordering, and restocking needs.

4. Reduced purchasing costs

Because vendors collect inventory data rather than purchase orders, a lot less is spent on calculating and producing POs. What’s more, the need for PO corrections and reconciliation is also removed, reducing purchasing costs even further. In other words, when planning and ordering is shifted to the supplier, customers often encounter serious savings along the way.

5. Less inventory needed 

Retailers who use VMI need significantly less stock at their warehouses, seeing as suppliers have a high degree of visibility of its goods (which prevents too much or too little inventory hanging around). In general, VMI’s philosophy is to keep inventory levels low and only place orders as needed, which can really lower costs in both the short and long-term.

6. Easier forecasting for vendors

Demand forecasting is the best way to make informed estimates on future market trends, and  help allocate budgets for anticipated expenses. Vendor managed inventory allows suppliers to readily access a customer’s point of sale data, which means their forecasting efforts are less complex (and more precise) to ensure enough stock is always available. 

7. Fewer stockout situations

Vendor managed inventory systems offer enhanced visibility into inventory counts, making it exponentially easier to prevent stockout situations. Since suppliers can see exactly when items need to be produced, they can reduce (or even eliminate) stockouts and shortages from happening, because they have the ability to restock goods without interrupting the customer’s operations. 

What does a vendor management system do?

A vendor management system allows a vendor to control and replenish inventory (1) at a customer’s location, and (2) at the levels required by the customer. Essentially, customers share a range of relevant data — usually EDI — like point of sale, current inventory levels, target inventory levels, and forecasting insights, all of which are used in a detailed and customized distribution plan that's developed by the vendor. 

A VMI system is an incredible tool for businesses taking advantage of VMI, as they can enjoy shorter lead times, greater transportation planning, improved customer experience, and more. Walmart is perhaps the most famous company currently using a VMI program, as it’s really no secret they’ve achieved the upper echelon of success and status with this particular platform.

Benefits of Vendor Managed Inventory (VMI)

Dual benefits for both supplier and Customer

• Data entry errors are reduced due to computer to computer communications. Speed of the processing is also improved.

• Both parties are interested in giving better service to the end customer. Having the correct item in stock when the end customer needs it, benefits all parties involved.

• A true partnership is formed between the supplier and the customer. They work closer together and strengthen their ties.

• Stabilize the timing of Purchase Orders – PO’s are now generated on a predefined basis.

Customer benefits

• Better visibility will make it possible to change from Air- to sea freight

• The goal is to have an improvement in Fill Rates from the supplier and to the end customer. Also, a decrease in stockouts and a decrease in inventory levels.

• Planning and ordering cost will decrease due to the responsibility being shifted to the supplier.

• The overall service level is improved by having the right product at the right time.

• The supplier is more focused than ever in providing great service.

Suppliers benefits 

• Visibility to the customers Point of Sale data makes forecasting easier.

• Promotions can be more easily incorporated into the inventory plan.

• A reduction in customer ordering errors (which in the past would probably lead to a return)

• Visibility to Stock Levels helps to identify priorities (replenishing for stock or a stockout?). Before VMI, a supplier has no visibility to the quantity and the products that are ordered. With VMI, the supplier can see the potential need for an item before the item is ordered.

Risk in Vendor Managed Inventory (VMI)

• Slow Moving items: It is not ideal to include slow moving items in VMI model. If the items has stock turn of 4 or less I would not recommend. Generally supplier asks customer to take inventory if not moved in 4 months max.

• Physical Count of Inventory: suppliers and customer must make sure the ownership of physical stock count is defined from the outset of agreement.

• New Product Introduction/Phase Out Items: I have found it is headache to manage to manage New Production Introduction and Phase Out plans for inventory on ramp down. This scenario needs special communication.

• Monthly Exception: We all trust the data in the system, don’t we!! On serious note we like to trust data in our ERP or Inventory management system, but discrepancies are bound to occur over long period of time. Therefore, I strongly recommend to monthly exception reporting to align physical inventory between supplier and customer.

References:

• https://www.skubana.com/blog/vendor-managed-inventory

• https://www.scmdojo.com/vendor-managed-inventory/