Vendor Managed Inventory (VMI): How It Works
Vendor managed inventory systems aim to benefit businesses and vendors alike. This platform is truly a unique supply chain initiative. The vendors authorize and manage inventories at customer locations, and practice continued communication with said customers to ensure everyone’s always on the same page. Read on to learn how VMI systems work and how they prove to be a win-win arrangement for both sides.
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What is vendor managed inventory (VMI)?
Vendor managed inventory (VMI) is an approach to inventory management wherein vendors oversee all the products in a retailer’s inventory; the vendor is most often a supplier, manufacturer, or distributor of goods.
The 3 factors that make a VMI system
Vendor managed inventory is characterized by three main factors that help distinguish this approach from other inventory management methods. The following are the qualities that make a VMI system what it is, and what set it apart from the rest of the crowd.
1. Vendor-controlled inventory management
While most inventory management puts business owners (and their team) in control of product movement, a VMI system is one where inventory is vendor-controlled. What this means is, it’s the vendors who are paying close attention to where products are within the supply chain, and they’re the ones who keep an eye on when it’s time to place replenishment orders.
2. Vendor-controlled reordering and stock keeping
Reordering and stock keeping are time-consuming responsibilities for businesses of all sizes. But for companies who use a VMI system, these tasks are vendor-controlled, which can free up several hours in the day. In this scenario, it’s the vendor’s job to take initiative with reorder points and to guarantee there’s enough (but not too much) stock on the shelves.
3. Business and vendor information sharing
Maintaining optimum inventory levels with a VMI system, it requires a great deal of information sharing between the business and their vendor. This typically looks like giving suppliers visibility into inventory counts at customer (or distributor) locations, and offering a look into customer demand to help solidify the vendor’s manufacturing planning.
Why do so many large businesses use VMI?
These days many large businesses use the advantages of vendor managed inventory in their business model to help reduce costs and to stop storing overstocked items. An effective VMI model offers serious supply chain optimization and takes away a lot of unnecessary stress, because it’s the vendors who are in charge of making sure customers have access to what they want, when they want it.
Here are some benefits of vendor managed inventory:
Better relationships with suppliers
At its core, the goal of a vendor managed inventory system is to create a mutually beneficial partnership between the supplier and the customer. This relationship not only fosters healthy collaboration, but it smoothly (and accurately) controls the availability of goods, as well as the flow of inventory items throughout the entire supply chain.
Less need for safety stock
With VMI, the need for safety stock is greatly reduced, because the supplier is the one responsible for managing replenishment lead times. When the supplier notices a customer is close to exhausting its inventory levels, they can very quickly prepare for replenishing, given that suppliers have more authority over their production schedule and distribution processes.
Less upfront supply chain management
When it comes to VMI systems, the manufacturer or distributor assumes the role of inventory planning, and is similarly accountable for the customer’s inventory replenishment. For these reasons, the business itself has much less to do with the SCM, and instead trusts the manufacturer to meet all of their sourcing, reordering, and restocking needs.
Reduced purchasing costs
Because vendors collect inventory data rather than purchase orders, a lot less is spent on calculating and producing POs. What’s more, the need for PO corrections and reconciliation is also removed, reducing purchasing costs even further. In other words, when planning and ordering is shifted to the supplier, customers often encounter serious savings along the way.
Less inventory needed
Retailers who use VMI need significantly less stock at their warehouses, seeing as suppliers have a high degree of visibility of its goods (which prevents too much or too little inventory hanging around). In general, VMI’s philosophy is to keep inventory levels low and only place orders as needed, which can really lower costs in both the short and long-term.
Easier forecasting for vendors
Demand forecasting is the best way to make informed estimates on future market trends, and help allocate budgets for anticipated expenses. Vendor managed inventory allows suppliers to readily access a customer’s point of sale data, which means their forecasting efforts are less complex (and more precise) to ensure enough stock is always available.
Fewer stockout situations
Vendor managed inventory systems offer enhanced visibility into inventory counts, making it exponentially easier to prevent stockout situations. Since suppliers can see exactly when items need to be produced, they can reduce (or even eliminate) stockouts and shortages from happening, because they have the ability to restock goods without interrupting the customer’s operations.
What does a vendor management system do?
A vendor management system allows a vendor to control and replenish inventory (1) at a customer’s location, and (2) at the levels required by the customer. Essentially, customers share a range of relevant data — usually EDI — like point of sale, current inventory levels, target inventory levels, and forecasting insights, all of which are used in a detailed and customized distribution plan that's developed by the vendor.
A VMI system is an incredible tool for businesses taking advantage of VMI, as they can enjoy shorter lead times, greater transportation planning, improved customer experience, and more. Walmart is perhaps the most famous company currently using a VMI program, as it’s really no secret they’ve achieved the upper echelon of success and status with this particular platform.
5 best practices for using a vendor management inventory system
Before you dive right in to adopting a vendor managed inventory system, there are a few things you should consider in order to have a healthy, lasting relationship with your supplier. The following are five vendor management best practices for using a VMI system that'll set your ecommerce business on the path toward good growth and a steady cashflow.
1. Openly share information with the vendor
Like it or not, your vendor can’t read your mind or naturally intuit what’s going on with your stock levels. That’s why it’s so important to share information and inventory data with them for the duration of your VMI relationship. Plus, real-time communication supports increased customer satisfaction, helps you avoid the dreaded bullwhip effect, and gives you confidence you’re able to fulfill customer needs and every order that comes through.
2. Keep vendors updated on seasonality
Nearly all product-based businesses will experience fluctuations in customer demand related to seasonality (maybe even outside the holiday season). If you’re relying on vendor managed inventory, it’s imperative to update suppliers on your forecasted surge in sales, so they can prepare to handle this influx and make sure you never run out of stock on any SKUs.
3. Update vendors with any quick changes in demand
In addition to keeping vendors in the know about the seasonality of your products, you need to notify them when demand shifts in the other direction, as well. If your sales suddenly drop off, or a certain item quickly loses its appeal, your supplier should be informed of these changes, so they don’t inadvertently deliver excess goods and create an overstock situation.
4. Negotiate fees up front
Negotiating fees up front just makes good business sense, and working with a supplier (via VMI) is no exception. When you discuss costs before entering into a formal agreement, you won’t come across unwanted surprises down the road. But in the event you do run into unexpected fees, you’ll be able to refer to your initial negotiations to help straighten things out.
5. Establish specific goals for your business
If you’re leaning in the direction of VMI, take some time to establish your specific goals and the expectations you’d like met. Doing so will provide a better understanding of what a successful supplier relationship looks like to you, and can help you evaluate whether the vendor is holding up their end of the bargain (or whether you need to take your business elsewhere).
How to use VMI alongside Skubana
If your ecommerce company is already using a vendor managed inventory system (or you’re planning to implement one soon), you can actually use VMI in conjunction with Skubana to attain superior functionality. Take Boldify, for example, who utilizes a VMI approach, but sought Skubana’s help when they were looking to grow their beauty and personal care brand.
Boldify needed a platform that could immediately plug into their Amazon and Shopify channels, and communicate with their suppliers for the most seamless supply chain. It’s safe to say Skubana delivered, by swiftly answering Boldify’s inventory-related questions, integrating with their existing systems, and offering unmatched automations and flexibility (thanks to an open API that could connect to all of their warehouses with ease).
But don’t just take Boldify’s word for it — schedule a demo with Skubana today, and start experiencing the difference for yourself!
While VMI isn’t necessarily the right fit for every ecommerce business, it might be worth looking into for yours. Partnering with a trusted supplier can help you build rewarding relationships, guarantee product is available when you need it, and ensure orders are fulfilled accurately every time. When done well, using a vendor managed inventory system and an inventory management software has dual benefits for both the supplier and the customer, and become a profitable venture for each party.
Vendor Managed Inventory Frequently Asked Questions
What are the disadvantages of vendor managed inventory?
Vendor managed inventory takes some responsibility of managing inventory away from one business and puts it in the hands of a vendor. This could be a disadvantage if there is a lack of trust, or the vendor is unable to handle the added responsibility.
What are the benefits of vendor managed inventory?
Some of the most important benefits of VMI include: less need for safety stock, fewer stockouts, less inventory needed, and lower purchasing costs. This frees up time for businesses to do other things like product design and marketing.
What is the bullwhip effect?
Bullwhip effect occurs when retailers react to an increase in demand for their product, even if it is temporary, that causes a ripple effect throughout the supply chain. Retailers expect the increase to be the norm, so they order more product, which causes distributors and manufacturers to increase their distribution and production.