Vendor Managed Inventory or VMI is an inventory management process in which the vendor creates orders for customers based on demand information that they receive from the customer. Furthermore, the vendor and customer are bound by an agreement which determines inventory levels, fill rates and costs. VMI can improve supply chain performance, reducing inventories and eliminating stock-out situations.
Today, there is specific VMI software that will verify if the data is accurate and meaningful. The software calculates a reorder point for each item based on the data and any customer information such as promotions, seasonality or new items. The quantity available at the customer’s end is compared with the reorder point for each item at each location. This determines if at all an order is needed and if so, the quantities required. Typically, in the traditional model, an agreement must exist between the manufacturer and the distributor on what to do if an overstock issue occurs. This happens in case of an ordering error. Also, both parties must agree on how to handle obsolete stock. VMI eliminates all this.
Why opt for VMI?
Benefits of VMI for the Customer:
The greatest benefit of VMI is that the vendor is responsible for supplying the customer when the items are needed. This eliminates the need for the customer to have significant buffer stock. Typically, a retailer has a buffer stock to service requests that come out of the blue. Lower inventories also mean that the customer can save on cost. This is especially great for products that come with a short shelf life. The customer’s greatest benefit is that VMI reduces his purchase cost. The customer can do without a dedicated department/personnel to calculate inventory required and purchase orders. There is no need for purchase order corrections and reconciliation which further reduces purchasing costs. Warehouse costs also come down for the customer. Lower inventories reduce the need for warehouse space and warehouse resources. Furthermore, the customer is not left with old stock that refuses to budge.
Benefits of VMI for the manufacturer:
Manufacturers also benefits from vendor managed inventory as they can gain access to a customer’s point of sale (POS) data. This data makes their forecasting easier. They come to know the seasonal surges in their product sales. VMI facilitates manufacturers in their customer promotional plans. They are able to come up with forecasting models and it means enough stock will be available when their promotions are running. There is no slack period. There is minimal gap between demand and supply. All these factors offer the manufacturer more visibility to their customer inventory levels. It is a lot easier to ensure that stock-outs will not occur as they can see when items need to be produced. VMI also sees a lot more customer retention than traditional supply chain models. This could also be due to the VMI’s installation cost. After investing a lot in the VMI system, it becomes extremely difficult and costly for a customer to change suppliers.
