What is Vendor Managed Inventory?
Vendor Managed Inventory simply says VMI. VMI is an inventory management system or a business model widely uses to have proper control over inventory. As the name says vendor manage the inventory. Or we can say upstream partner control and manage the inventory of downstream partners. The upstream partner can be the vendor or the manufacturer of the products. The downstream partners are the distributors or retailers. In a normal context, customer places the orders for inventory refilling by keeping records on the stocks and forecasts. VMI put the customer’s life at ease by controlling the customer’s inventory by the vendor.
How Vendor Managed Inventory Works?
In VMI downstream partners does not worry to do forecasts, keep safety stocks or to reorder products. They just allow their upstream partners to take care of the inventory for their business. This is a method to reduce the echelon inventory in a supply chain. As well as this method transfer the risk of stock-outs, catering to the sudden demands and reordering to the upstream partner. The percentage of risk and workload sharing depends on the VMI programme both partners have agreed. So, partners can decide whether one task, few tasks or all task become vendors responsibility.
The vendor can physically count the inventory available at customer’s place. The vendor can analyse these data by considering the external factors like promotional campaigns of competitors, seasonal demand patterns and product’s price reductions. Then refill the stocks with the vendor’s inventory
The vendor can physically count the inventory available at customer’s place. Then place the order for production and inventory deliver on a later date. The vendor arranges the transport and fills the customer’s warehouse if agreed so. Or the customer will arrange the transport from the vendor.
Customer or the downstream partner provides the available inventory count to vendor periodically. Vendors review the stock counts and do the production as necessary. After the product delivers the products to the downstream partner for him/her to perform physical stocking.
The vendor has real-time access to the customer’s inventory level. So, the vendor can review the stocks on hand, production schedules, pending orders, demand forecasts, reorder point etc. By looking at them vendor makes replenishment decisions and deliver products to the customer.
Inventory planner from vendor’s company place at customer’s premises. The planner work full time at the customer to manage the inventory of products belongs to his/her company.
Vendor lease space at the customer’s premises to operate a warehouse. Vendors operate the warehouse at their cost including the employees to plan the inventory for customer.
VMI Benefits to Manufacturer
- Guaranteed Business as customer will not change the vendor for a long time period
- High accuracy in inventory forecasting
- Understand the end customers’ requirements more accurately
- Can reduce the holding inventory level
- Better planning and scheduling
VMI Benefits to Retailer/Distributor
- Transfer the risk on inventory management to manufacturer
- Reduce the administrative cost
- Optimum product mix
- Minimize stock outs and improve the customer service
- Improve the warehouse management system
What are the Factors for Successful VMI?
Trust and reliability plays the bigger role as downstream partner have to share all the information
Commitment of the top management is a must on quick decision making as appropriate
Reliable and effective IT facilities (Electronic Data Interchange EDI, Barcodes) to track inventory data
Competent manufacturer/vendor as the downstream partner’s business will depend on the upstream
Adaptability and fast solutions from both parties as VMI implementation will not be easy at the beginning. Because, it require lot of learnings and understandings of each parties