Vendor Managed Inventory (VMI) is fast becoming an essential service in global supply chains. As the world shrinks, demand for the movement of goods across the globe and expectations for fast delivery have simultaneously increased. Implemented for efficiency and to simplify the supply chain management process wherever possible, VMI is a streamlined approach to order fulfilment and inventory management that benefits both suppliers and buyers.
Vendor Managed Inventory (VMI): Definition and Uses Within the Modern Supply Chain
Vendor Managed Inventory or VMI is an integration process whereby vendors of a material manage as many factors of the supply chain as possible. The essential difference between VMI and traditional inventory management is that rather than the buyer making independent decisions about order size, with VMI the buyer shares their inventory and demand data and their delivery parameters with the supplier (vendor). By sharing this information, the buyer enables the supplier to determine the order size. Consequently, the supplier is responsible for managing the supply chain from end-to-end and the buyer is responsible for the provision of accurate and timely information necessary for forecasting.
How Does Vendor Managed Inventory System Work?
Vendor Managed Inventory works by creating a symbiotic relationship between both sides of a transaction that allows the parties to share risk and work together for shared benefits. By taking care of a buyer’s inventory and supply chain management, the vendor can oversee and manage the entire supply chain. VMI will generally involve management of all aspects of the supply chain including sourcing of the materials, overseeing trends in the market, managing the shipping process and delivering the required destination and warehouse.
For the buyer, VMI will ensure the only factor they are concerned with is the delivery date of the raw material or product to its final destination. Better communication, stock management and inventory accuracy, forecasting and overall service is possible through VMI as intermediaries are removed to create a service that has considered all aspects of the supply chain and any areas for concern. This allows VMI to decrease the impact of the bullwhip effect, a phenomenon that sees accuracy of information on customer consumption decreasing in accuracy as you move further up the supply chain (further from the consumer). By keeping analysis of consumer behaviour and appropriate stock size in the hands of the supplier, VMI prevents excessive stock and inefficiency in the supply chain.
The immediate benefit is that the buyer deals with the supply chain as little as possible. This reduces workload for the buyer and allows the supplier to take charge of the order size in addition to the logistics of making the stock available. VMI mitigates the risk of becoming out of stock or oversupplied, because it allows increased transparency and communication. It is therefore then possible to incorporate increased replenishment frequency, enabling a faster reaction to market demand. The benefits of this streamlining reduces overall cost for both parties.
Elements of Vendor Managed Inventory:
- Transparent inventory levels
- Clarity of stock ordering
- Items held securely in a warehouse
- Monitoring the market
- Shipping and delivery
- Restocking needs are covered
- Cost management
What are the benefits and advantages of vendor managed inventory:
- Reduction in carrying costs
- Reduced need for safety stock
- Efficient supply chain management
- Better communication
- Streamlined execution
- Simplicity across the supply chain
- Productivity / cost savings
Advantages of using VMI for buyers
The main value of Vendor Managed Inventory for buyers is the simplification of the supply chain. By allowing the supplier to take charge of the order size and supply chain stages leading up to delivery, the buyer’s focus can be marketing and selling the final product to the consumer.
Costs are reduced as there is reduced admin needed to make purchase orders, and potential losses and oversupply are mitigated by the supplier knowing exactly how much stock is needed. Buyers also gain the advantage of consumer-suited stock and can have a closer relationship with their customers, building an in-depth knowledge of their client base.
Advantages of using VMI for suppliers
Suppliers benefit from gaining access to a buyer’s POS data, which makes their forecasting much easier. With this access, the buyer can incorporate existing sale patterns and any promotional plans to ensure that enough stock will be available to the consumer exactly when it is needed. The supplier also gains economies of scale from being involved end-to-end in multiple supply chains.
By alleviating the complexity of the supply chain process, VMI ensures that every person or company involved in the process is focusing on their individual strengths. From lorry drivers, to warehouse owners, to customs clearance, all threads of communication are managed directly by the supplier. For suppliers, having complete control of the replenishing, releasing, and clearing of stock saves time and costs.
Costs are reduced as the supplier has access to regular inventory checks and fluctuations in the market, enabling them to grow their stock in an appropriate manner. This in turn reduces purchase-related admin costs and removes the need of having a significant amount of safety stock, as the supplier can re-stock with enough lead time to ensure demand is met. By mitigating the risk of costly setbacks such as emergency rush orders and preventing under and overstocking of a product, VMI can be a transformative tool for suppliers.
Why use Vendor Managed Inventory?
For VMI to work effectively, trust between parties is essential. Relying on someone not affiliated with your business can be daunting, particularly when they are managing important aspects of the supply chain. However, despite this it is important to remember that the aim of VMI is mutual benefit. It is by distributing responsibility in a unique way that the optimum benefits for both supplier and buyer can be reached.
Using VMI can prevent the financial risk that is associated with traditional inventory management. This risk arises when buyers either spend too much time managing the processes themselves, or outsource to a possibly untrustworthy third party. Additionally, there is a financial penalty for holding too much inventory which the buyer can avoid through VMI. For suppliers, financial risk arises when they are required to call in emergency stock or suddenly increase their output.
Author: Wassim Sasso
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Photographers: Marcin Jozwiak, Tomas Williams and Simone Hutsch