What is VMI?
Vendor Managed Inventory (VMI) is when suppliers manage their customer’s inventory. This occurs through physical counts or using data from their customers. Once inventory levels reach their reorder points, vendors will replenish their customers’ stock for them.
The primary goal of this is to cut down on costs and be more efficient. How does this happen? Vendors can often manage inventory more effectively than their customers. This is because their focus is inventory goals. Vendors work to reduce obsolete inventory and stock outs. But, customers may be trying to meet other metrics. For example, they may take into account customer service goals. As a result, this can impact when they reorder their products.
As a result, this can lead to large, rushed orders that confuse vendors. In contrast, VMI can mean smaller, more consistent orders that help hit inventory level targets. Since customers have other focuses besides inventory targets, errors are more likely. In addition, customers may be receiving diverse orders and cannot manage inventory as efficiently as their vendors. VMI allows customers to focus on other metrics.
The Rise of VMI
VMI became popularized in the 1980’s by Walmart and Procter & Gamble. This concept has become more and more popular ever since. For Walmart, they have seen great success from their VMI set-up. With online software, vendors can access inventory data. As a result, vendors have total control over when to replenish stock. Wal-Mart also holds their vendors to Key Performance Indicators (KPI). In conclusion, VMI effectively reduces Wal-Mart’s inventory levels, as each vendor works to minimize inventory and maximize profits.
Top 3 Benefits of VMI for Vendors
VMI gives vendors more control so they can accurately forecast demand. As a result, production can be more efficient. They can practice lean manufacturing and make frequent deliveries. Also, VMI reduces stock levels, and decrease stock shortages. Moreover, vendors using VMI will have total visibility into their customers’ inventory levels. They can better meet demand and reduce inventory errors and costs.
Strengthen Customer-Vendor Relationships
Suppliers are able to develop stronger relationships with their customers through better quality service. Vendors in VMI will become more valuable suppliers. In turn, this will increase the strategic communication. VMI can provide major benefit for both parties.
Reduce Inventory Costs
Since VMI gives vendors control, they can eliminate wastage, non-value adding factors, and other costs. Accurate planning cuts the cost of storing excess inventory and reduces obsolete stock. More importantly, vendors are able to eliminate stock shortages and the high delivery costs to ship expedited orders.
Top 3 Benefits of VMI for Customers
Reduced Inventory Overstocks and Stock Shortages
As mentioned, VMI can reduce overstocks and stock shortages. As a result, they are reducing the factors that cause uncertainty. Not having the right products in stock can be a big problem for customers. Moreover, this can be costly. Sales will be lost from stock shortages and overstocked items will have storage costs.
VMI can increase sales by ensuring that products are always in stock and available for purchase. Product availability will boost the quality of customer service and create brand loyalty. As a result, this means more returning customers and sales over time
Typically, a vendor’s customers are distributors or retailers. They are often receiving from hundreds of different suppliers and many different locations. For this reason, it is hard to keep track of inventory moving in and out. This is where VMI comes in to defer responsibility. It lowers costs, reduces admin work, and allows them to focus their efforts on other areas within their business.