Vendor Managed Inventory (VMI) is when the vendor/supplier owns the retailer’s ordering cost, while the retailer pays for their own holding cost. This program can prevent stocking undesired inventories and therefore leads to an overall cost reduction. Further, the bullwhip effect is also reduced by employing the VMI approach in a buyer-supplier collaboration. Resupply is performed by the vendor through regularly scheduled reviews of the on-hand inventory. The on-hand inventory is counted, damaged or expired goods are removed, and the inventory is restocked to predefined levels.
Although the concept of VMI was originally developed for high-volume situations – it’s one of the most successful business models used by Walmart and many other big box retailers, grocery chains and automotive OEM applications – it’s not limited to high volume anymore. In fact, VMI applications in low-volume environments have been growing significantly. Discussed below are three advantages as to why.
1. Both Buyers & Suppliers Win Through Shift in Inventory Ownership
The key factor underlying with VMI in low-volume applications is that the ownership for management of inventory levels of specific products is shifted to the party which likely, has the greatest expertise in doing so. As a result of this shift in ownership responsibilities, both the buyer and supplier can benefit in other areas as well.
Organizations participating in VMI programs gain immediate, on-site availability of products included in the VMI process and the buyers can expect that the minimum quantity levels and replenishment rate recommended by the supplier will be adequate to provide that level of product availability. The supplier is generally expected to adjust quantities and replenishment frequencies, in some cases with consensus by the buyer, as necessary to achieve target in stock levels. In many low-volume VMI environments, this may be as simple as a weekly check of stock levels with a replenishment of required items during the weekly review.
2. Decreased Overhead for the Buying Organization
Buyers traditionally experience a decrease in costs associated with the clerical/administrative activities associated with products included in VMI programs. In many cases, when a traditional replenishment approach is replaced with a vendor-managed program, the supplier’s employees assume duties such as inventory ordering, cycle counting, physical stocking and other tasks previously performed by buying organizations.
Although there are typically some costs incurred by the supplier in conducting these activities, suppliers are generally able to execute these tasks at a lower cost than the buyer and can recover most or all of the costs of these activities through rewards of additional opportunities. Many VMI programs have meaningfully reduced or removed invoicing activities for individual replenishments by providing summaries which again saves accounting labor for both the buyer and supplier.
3. Improved Data Sharing and Reporting
Through the utilization of VMI,it’s to be expected that the supplier will be in a position to better, and more accurately, deliver buyers with management information, such as what products were purchased, in what quantities of each were used, and what the total spend was (to name a few). The supplier benefits because this capability and real time information can provide valuable understandings into the spending patterns of buyers and further strengthens the buyer-suppliers relationship.
Starting your VMI process can be a big change for both the supplier and its buyer. VMI promises many benefits like lower inventory carrying costs, lower administrative costs, more efficient ordering processes, and better data management. Making the change from a traditional buyer-managed system to VMI requires the vendor and customer to fully trust each other and to adopt compatible systems with strong protections for the confidentiality of customer information. Over time, the supplier can use the data it collects to improve its responsiveness and collaboratively help the customer identify opportunities for cost savings.