Vendor Managed Inventory — A Guide to Inventory Management

Vendor managed inventory (VMI) can help suppliers to make informed decisions and manage their inventory levels. However, what is it?

In this article, we will discuss what vendor managed inventory is. We will talk about how it works and the three factors that make the VMI system. We will also tackle the limitations and benefits of VMI. Furthermore, we will tell you the best practices and show you an example of VMI.

Once you finish reading this article, you will gain a deeper understanding of what VMI is. Thus, enabling you to decide if it will be the suitable approach for managing your inventory.

But before you read the whole article, a free-to-download ABC-XYZ Analysis template. It’s a PowerPoint file that can help you gain insights into your inventory. I even made a video where I’ll explain how you can use this template.

Vendor Managed Inventory: What is it?

Vendor Managed Inventory (VMI) refers to the approach where suppliers handle a retailer’s inventory for them. They make decisions and keep restocking the products continuously. To make VMI work, there’s a way for suppliers to get the retailer’s sales and inventory data, like through the Internet. This data helps suppliers know what to stock and when to order more. Traditionally, the retailer does all of this.

With VMI, the supplier and retailer share inventory data automatically. This makes the supply chain work better and match the actual demand. It helps to predict what’s needed, send products at the right time, and keep enough stock in stores. This way, they can quickly adapt to what customers want.

Furthermore, vendors may use special software to plan when to ship and produce goods called Vendor Management Inventory System (VMIS). Utilizing a vendor management system allows the vendor to handle and restock inventory at the customer’s location based on their specific needs. Customers share important data like sales, inventory levels, targets, and forecasts with the vendor using EDI (Electronic Data Interchange). The vendor then creates a detailed plan customized for each customer.

VMI is a fantastic tool for businesses using it, as it offers benefits like quicker lead times, better transportation planning, improved customer experience, and more efficient operations.

Why does Vendor Managed Inventory Matter?

Vendor Managed Inventory matters because it transforms the efficiency of business inventory handling.

It removes the hassle of inventory management by simplifying operations and reducing costs throughout the procurement process. It also automatically replenishes the essential items of your business.

This game-changing system helps your business to do what you do best while ensuring customers are happy. Giving your suppliers a proactive role can help create more data-driven decisions and help you meet customer demand as much as possible.

How Does it Work?

Now that you know what Vendor Managed Inventory (VMI) is, let’s now explore how it works.

Vendor Managed Inventory (VMI) is an arrangement where a seller and a buyer work together by setting specific goals and measures for their partnership. These goals usually focus on having enough products available, how fast products are sold, and the cost of transactions. The agreement also covers important details like when the buyer pays for the inventory and how excess inventory is handled.

In the VMI process, the seller directly sends products to the buyer or retailer. The seller then takes responsibility for closely watching the sales and inventory levels at the buyer’s location. They use predictions and calculations to know when to reorder and restock products.

To make sure everything works well, the seller’s VMI specialist carefully checks the calculations before placing orders. The success of VMI depends on how well the seller understands when the buyer needs more products, which relies on the buyer sharing their sales and demand data with the seller.

In a nutshell, successful VMI relationships are based on teamwork and sharing information between the seller and the buyer. This helps manage inventory efficiently and ensures products are available when needed.

The Three Factors in VMI System

Vendor managed inventory (VMI) stands out from other inventory methods because of three key qualities. The following characteristics define what makes a VMI system special and different:

1. Vendor-controlled reordering and stock keeping

Vendor Managed Inventory (VMI) simplifies inventory management for businesses. With VMI, the vendor takes charge of reordering and stock-keeping tasks, saving companies time and effort. The vendor ensures the right amount of stock is available, reducing the burden on the buyer.

2. Vendor-controlled inventory management

In regular inventory management, business owners have control over their products. But in a VMI system, vendors take charge of inventory. They keep track of where products are in the supply chain and decide when to reorder them. It’s the vendors’ responsibility, not the business owners.

3. Business and vendor information sharing

In a VMI system, maintaining the right inventory levels involves sharing a lot of information between the business and its vendor. This means giving suppliers access to inventory counts at customer locations and sharing customer demand data. This helps the vendor plan their manufacturing effectively.

Limitations of Vendor Managed Inventory

The following are some of the limitations that many vendors commonly face in VMI:

1. Dealing with unreliable partners

When a business uses VMI, the vendor becomes responsible for delivering inventory on time and in the right amounts. However, some suppliers may lack expertise, proper infrastructure, or the right software, leading to supply chain disruptions.

2. Challenges in supplier delivery

In a VMI system, dishonest vendors might send excessive inventory to boost their sales figures. Customers may face difficulties returning the surplus stock, causing inconvenience.

3. Losing control

With VMI, businesses give up control of inventory and rely entirely on the vendor. This might be challenging for some businesses who find it hard to trust a third party with their data and decision-making.

4. Adapting to customer preferences

Customer preferences can change rapidly, affecting business success. VMI contracts should account for these changes to avoid being stuck with unwanted inventory. Instead, vendors should adjust their inventory according to customer tastes and preferences.

Benefits of Vendor Managed Inventory

Although vendors face many challenges with VMI, they also gain lots of benefits from VMI which are the following:

1. Increased collaboration and data sharing

VMI fosters closer collaboration between vendors and buyers, promoting better communication and data sharing. This collaborative approach leads to improved decision-making and a more agile supply chain.

2. Higher customer satisfaction

With accurate demand forecasting and better inventory availability, VMI ensures products are consistently in stock, reducing the chances of disappointing customers due to out-of-stock situations.

3. Focus on core competencies

As the vendor takes on inventory management tasks, businesses can focus more on their core competencies, such as product development and marketing, leading to increased innovation and competitiveness in the market.

4. Opportunities for continuous improvement

By closely monitoring inventory levels and sales data, businesses can identify areas for improvement, optimize supply chain processes, and enhance overall efficiency in inventory management.

5. Lower costs

VMI leads to a more precise understanding of product demand, enabling businesses to optimize their inventory levels. By reducing work-in-process inventory, raw materials inventory, and finished goods inventory in the warehouse, as well as minimizing in-transit inventory and safety stock, carrying costs can be significantly decreased.

6. Decrease the bullwhip effect

VMI helps to mitigate the bullwhip effect, a phenomenon where material orders increase significantly as they move up the supply chain in response to demand fluctuations. VMI allows for better coordination and more accurate inventory management, minimizing these fluctuations.

The Impact of VMI on Procurement

Vendor Managed Inventory is a transformative approach that continuously reshapes traditional procurement dynamics.

It impacts efficiency, collaboration, and supply chain management. 

The process takes a more active role in ensuring the buyer-supplier relationship. Below are the substantial impacts of VMI on Procurement:

1. Inventory Efficiency

One of its substantial impacts on procurement is its efficiency in delegating inventory tasks.

It serves as your partner that reduces the manual effort and time that you can allot for other crucial tasks.

A procurement professional could always use the handy help whenever, wherever.

2. Cost Savings

Cost savings also serve as a notable outcome of a successful VMI implementation.

Your system partner, the VMI, minimizes carrying costs by optimizing your inventory levels. It prevents stock excesses or shortages that can burden you with financial losses. We all know that losses are the last thing we want for the company.

3. Transparency

For the Procurement Tech heads, VMI introduces a new period of transparency and visibility within the business. It incorporates technology to do the hectic work.

Accessing inventory levels and tracking supply patterns and consumption trends can enhance the company’s decision-making.

In short, the process makes the procurement life easier.

4. Improved Supplier Relationship

VMI can boost the collaboration between buyers and suppliers.

The responsibility for this management type fosters improved communication, trust, and a better understanding of the business needs.

It’s like a symbiotic relationship that pushes the better within buyers and suppliers.

The Three Best Practices in VMI

Here are three best practices for using a VMI system to ensure your e-commerce business grows well and maintains a steady cash flow:

1. Set clear goals

Clearly define the objectives and expectations you have for your business and the VMI relationship. Establish specific metrics to measure the vendor’s performance, such as on-time delivery, inventory turnover, and order accuracy. Regularly review and assess these goals to evaluate the success of the partnership and identify areas for improvement.

2. Notify changes in demands and seasonal changes

Market conditions can change suddenly, leading to shifts in customer demand. If you observe a sudden increase or decrease in demand for specific products, promptly inform your vendor. This enables them to adjust their production and delivery schedules accordingly, preventing the accumulation of excess inventory or potential stockouts.

Additionally, In many businesses, demand fluctuates throughout the year due to seasonal variations. By informing your vendor about these changes in advance, they can adjust their inventory planning to meet the expected surge in demand during peak seasons.

3. Share information

Effective communication with your vendor is crucial in a VMI system. By openly sharing inventory data, sales trends, and customer insights, you provide your vendor with valuable information to optimize inventory levels. This ensures they can fulfill customer orders promptly and avoid stockouts or excess inventory, leading to higher customer satisfaction.

Example of VMI

Here is an example of a vendor managed inventory for you to understand it further. A cell phone retailer, “TechZone,” has a VMI agreement with “Samsung.” “TechZone” regularly shares its sales data, current inventory levels, and demand forecasts with “Samsung” through electronic data exchange (EDI) or an online system.

Using this data, “Samsung” calculates the lead times and replenishment requirements. Its inventory specialist reviews the calculations and places all the replenishment orders for “TechZone.”

A successful VMI relationship between “TechZone” and “Samsung” relies on consistent and accurate information sharing. This collaboration is essential for a well-functioning and profitable vendor managed inventory system.

In this scenario, “TechZone” wants to ensure that they always have the latest Samsung cellphone models and popular variants in stock without running out (in-stock performance). On the other hand, “Samsung” aims to optimize its inventory turnover rate to minimize excess inventory and associated costs. Both parties also seek to reduce transaction costs related to ordering and managing inventory.

As per the VMI agreement, “Samsung” owns the cellphone inventory, but it is stored at “TechZone” retail locations. Here’s how the process works:

1. “TechZone” shares its sales data, current inventory levels, and demand forecasts with “Samsung.”
2. Using this information, “Samsung” calculates the best order sizes and frequencies to maintain inventory levels and meet “TechZone” demand.
3. “Samsung” ships the required cellphones to “TechZone.”
4. A VMI specialist or planner from “Samsung” closely monitors “TechZone” inventory levels and sales patterns to ensure optimal stock levels are maintained.
5. When it’s time to reorder, the VMI specialist or planner from “Samsung” places the replenishment order with their own inventory, which is then sent to “TechZone.”

By using VMI, both “TechZone” and “Samsung” benefit from reduced inventory costs, better inventory management, and improved in-stock performance. The VMI arrangement streamlines the ordering process, leading to lower transaction costs for both parties and a more efficient supply chain for Samsung cell phones.

Companies Who Implements VMI 

Vendor Managed Inventory creates a strong line of communication to ensure your stock room is always full. Big companies say it’s all about communication and technology.

Here are five big companies putting VMI into action:

1. P&G, Walmart Partnership:

P&G works collaboratively with Walmart to ensure their products are shelved sufficiently in the retail giant’s stores. Through VMI, P&G runs an automated system that runs its checks on Walmart’s inventory levels. 

The process ensures a continuous flow of stocks that positively increase the profit of both companies. The great process makes sure that customer is also satisfied with their services.

2. Coca-Cola and the Bottle Partners

The beverage company uses VMI to manage the production and distribution of their products. By working hand-in-hand with their partners, they make sure that their inventory and schedules are on time. 

If there’s a need for bottle stocks, they can adjust production for a constant stream of Coca-Cola beverages.

3. The Toyota Supplier

Toyota’s production process relies on Vendor Managed Inventory to create a strong network of suppliers. 

They use VMI to maintain inventory in crucial stages. Suppliers ensure they automatically resupply what Toyota needs. The VMI-handled relationship eases Toyota’s production while minimizing inventory costs.

4. Dell and Component Resourcing

Dell utilizes VMI through their component suppliers. Dell’s build-to-order strategy relies on VMI as a critical part. 

For example, when customers ask for customized computers, Dell’s suppliers can provide the required components on the go. VMI then reduces the cost of unnecessary inventories

5. W.W. Grainger

W.W. Grainger is a Maintenance, repair, and operations (MRO) products supplier that offers Customer VMI solutions to its customers. 

The service aims to keep customers’ inventories of MRO supplies in check. The company’s system ensures that inventory levels are monitored and automatically restocked when needed. The reduced hassle ensures that customers come at a steady pace.

My Insights on VMI

Vendor Managed Inventory (VMI) has emerged as a transformative strategy in supply chain management, reshaping the traditional inventory control and procurement approach. For this article, I will share my insights on VMI.

Conclusion

Vendor Managed Inventory is a tool that simplifies and manages inventory control. Through improving supplier relationships and having a collaborative approach, it becomes easier to create opportunities. These opportunities optimize the supply chain, create potential cost-saving strategies and foster trust and responsibility between buyers and suppliers.