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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 of the stocks and forecasts. vendor management system put the customer’s life at ease by controlling the customer’s inventory by the vendor.
How Vendor Managed Inventory – (VMI) Works?
In VMI downstream partners do 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 to. So, partners can decide whether one task, a few tasks or all tasks become the vendors’ responsibility.
The vendor can physically count the inventory available at the customer’s place. The vendor can analyse these data by considering the external factors like promotional campaigns of competitors, seasonal demand patterns and product 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 points 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 customers.
VMI Benefits to Manufacturers
- Guaranteed Business as the 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 Retailers/Distributors
- Transfer the risk on inventory management to the manufacturer
- Reduce the administrative cost
- Optimum product mix
- Minimize stockouts and improve the customer service
- Improve the warehouse management system
What are the Factors for Successful VMI?
Trust and reliability play a bigger role as a downstream partner has to share all the information
The commitment of the top management is a must in 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 requires a lot of learning and understanding of each party
Do VMI a Good Practice?
VMI has pluses and minuses. As discussed above it gives benefits to both upstream and downstream partners. At the same time, the downstream partner has to put extreme trust on the vendor when they agree on a vendor management system. Because the VMI make the core areas of the customer’s business visible to the upstream partner. Yet, by allowing vendor to control the inventory customer can take a heavy weight out of his/her head. Because inventory management is very critical to the companies and can be a huge pressure on the procurement team. The success of the VMI depends on how much both parties commit towards the process. A well-handled vendor management system benefits both the upstream and downstream partners. So, VMI is a good practice as long as both vendor and customer work together to benefit each other
What is Vendor Management Inventory Software?
Using software which provides real time information to vendors for inventory management are VMI software. These software are widely used to have more accurate data and for reliable data transmission to vendors. You can have in-house developed VMI system or purchase an available VMI system.