What is Vendor Managed Inventory (VMI)?
Vendor Managed Inventory or VMI is a collaboration between you and your suppliers where your suppliers manage the level of inventory based upon pre-arranged stock levels. The supplier is responsible for maintaining a set inventory level at the buyer’s (your) distribution locations.
In the traditional inventory control model, you, as the customer, would determine your necessary inventory levels, frequency of orders and the quantity of each order. Under a VMI model, you share your inventory level data with suppliers, and they agree to hold that amount of inventory at your disposal. (It means the responsibility of inventory control is passed to them.)
This way, the supplier can optimize production volumes and delivery strategies, and the customer needs less working capital and warehousing space. This ultimately aims at reducing costs for all parties.
What are the benefits of VMI?
VMI offers numerous benefits for both supplier and customer when it is appropriate and well planned. Here are some of the key benefits of this supply chain management practice:
More efficient inventory control and raw material handling for the supplier; this allows for reduced costs and the chance for the supplier to adopt a leaner approach to manufacturing.
Reduced risk of stock-outs and product shortages for the customer (for example, at the retail level). When products go out of stock, this is a direct loss of potential revenue. VMI provides sales data on seasonal trends, promotional effects, special offers and general day-to-day stock movement which allows the supplier to be in-tune with product demand.
Stronger buyer-supplier relationships may be built, which in turn allows both parties to become stronger and better in the business relationship (better communication, better new product introduction opportunities…).
Improved processes over time as the supplier will have input into your inventory management process as well as achieving more efficient ordering and accurate data between all parties.
Who is Vendor Managed Inventory for?
VMI is used by all kinds of businesses from restaurants, small retail shops, big box stores, oil companies and online retailers of all sizes. Walmart started using VMI back in the 1980s, which allowed them to become more efficient in their inventory control of thousands of items supplied by thousands of suppliers. The introduction of VMI since then has become more widespread as retailers are seeing the increased benefits.
If you are thinking of implementing VMI to your supply chain, there are several things to consider before jumping in headfirst.
How to implement VMI
In order to make VMI work, the implementation needs to be carefully planned out. Here are some guidelines that will help you implement yours (these are the best practices that we follow when setting up VMI):
1. Set expectations
VMI is a long-term strategy with best results being obtained over the longer period, make sure all parties involved fully understand the following:
- What each party can expect from implementing VMI?
- What timescales will be involved before benefits are likely to be seen?
- The amount of safety stock the supplier should be holding while the system is being matured?
- What needs to be done before implementation?
Clear communication is essential throughout the implementation of VMI and beyond. All parties need to communicate on a regular basis, the best way is to have a communication plan where all parties meet at scheduled times:
- Determine how data is communicated, again this is an essential element of VMI and must be as accurate as possible for VMI to work correctly.
- Never let communication from your side be the catalyst for failure.
3. Integrate systems wherever possible
Data transfer is one of the systems that should be automated. Manual data updates and transfer of spreadsheets can lead to errors and costly mistakes. Implementing an automated system removes most chances of errors.
You should also:
- Improve reliability of forecasting and continuously improve stock management and product delivery.
All these points will help you while planning the implementation of VMI. Remember, this is a long term strategy and not a quick win play. VMI needs to be implemented carefully. You can assume there will be issues along the way, but this is where clear communication is critical and all parties come to an agreement on moving forward.
Can Sofeast provide VMI?
Yes, we can set up VMI with your supplier/s as a part of our Value-Added Procurement Office in China solution if that’s something that your project requires. We will address this on a case-by-case basis.
If you need any help with implementing VMI, reach out to team to discuss in more detail.