What sets industry leaders apart from other businesses? For many of these successful companies, a Vendor Managed Inventory (VMI) system is the secret to their enviable growth.
In today’s fast-paced, demand-driven economy, businesses can’t afford to be inefficient. If you want to drive sustainable growth for your business, you have to achieve the right balance of cost reduction and fulfillment flexibility.
Of course, without the right tools, this is no simple task.
To break it down, efficient supply chain and inventory management practices should do two things: minimize inventory costs and maximize profits.
Why Vendor Managed Inventory?
In recent years business models have moved towards leaner inventory practices and demand-driven supply chain management. This shift has made vendor managed inventory a highly sought-after solution. Now, VMI is the inventory management method of choice for global industry giants like Grainger, EIS Inc, Walmart, and Amazon.
VMI relationships are collaborative partnerships between vendors and customers that put the vendor in charge of optimizing the customer’s inventory. This is a proven method that reduces the inventory costs of both partners.
2 key features of VMI make this possible:
- Vendors have greater authority over production and distribution schedules. Therefore, when the vendor is equipped with better inventory data, they can make key decisions that eliminate stockouts while also reducing safety stock levels.
- An emphasis on data-sharing between vendors and customers increases visibility and makes data analytics more powerful. As a result, vendors use better demand forecasting to meet inventory goals, while customers focus on improving other metrics like customer service and brand loyalty.
The Problem with Sales Data
Information tends to become distorted as it moves from the consumer end of the supply chain to the manufacturer. Known as the bullwhip effect, this distortion significantly impacts a business’s bottom line. Better coordination and enhanced data sharing between vendors and customers improve supply chain performance. In turn, this increases profits for all supply chain members.
A Win-Win Solution
Vendors and customers enter into a mutualistic partnership when they implement a VMI program. In other words, vendor managed inventory programs are mutually beneficial for the vendor and the customer.
Mutual Advantages of Vendor Managed Inventory
- Accurate Demand Forecasting takes the guesswork out of maintaining optimal inventory levels at customer sites
- Automatic Replenishment eliminates data entry errors and reduces the amount of safety stock customers store to avoid stockouts
- More Control for vendors to create both manufacturing/distribution schedules as well as purchase orders means less responsibility and uncertainty for customers
- Real-Time Performance Monitoring lets vendors adjust inventory levels at customer sites to match changing demand, eliminating stock shortages (lost sales) and overstocked items (high storage costs)
- Full Visibility helps strike a balance between cost containment and fulfillment flexibility by letting vendors know exactly where their inventory is in the supply chain, in real-time
- Tighter Customer-Vendor Communication ensures the right products are always available, resulting in improved customer service and stronger brand loyalty
It Pays to be Prepared
It’s true that vendor managed inventory boasts a long list of benefits. Even still, switching to a VMI method of inventory management is a big change for both partners.
If you’re considering entering into a VMI partnership, keep this checklist of best practices on hand. After all, this list will ensure both you and your potential partners are on the same page and establish an effective and sustainable relationship.
Vendor Managed Inventory Best Practices Checklist
- Both partners are using the same VMI software, ensuring tight security and data integration. Save time and money by eliminating the need to manually transfer data between different systems.
- Open and constant communication is being maintained between partners through detailed data sharing. Regular cycle counts and monthly exception reporting ensure physical inventory counts remain aligned.
- Users at each company have been granted different levels of access based on their operational needs to keep inventories private and only accessible to the appropriate user.
- Due diligence has been conducted to ensure a good vendor-customer match that will support healthy collaboration and satisfy each partner’s specific business needs.
- Shared goals have been clearly identified and a set of performance criteria have been defined to ensure these goals are consistently being met.
- The terms of the VMI arrangement (fees, data security, ownership of physical stock, etc.) have been negotiated right from the outset.
Examples of Vendor Managed Inventory Relationships
It’s one thing to read about how a VMI system is supposed to work. Imagining the best possible setup that would align with your business’ unique workflow can be much more difficult. Clear Spider built their cloud-based system to offer the flexibility to mirror any workflow and, as a result, offers a nearly endless list of possible use cases for a VMI system.
Below we’ve outlined just a few common VMI examples:
- Vendor-Owned Industrial Vending Machines – The vendor will often place representatives at each of their customers’ locations, where the vendor retains ownership of their inventory until the moment the customer takes an item for use. This allows them to make inventory decisions and create purchase orders on-site.
- A Form of Consignment Inventory – In this VMI set-up, the vendor retains ownership of the inventory they are storing at their customers’ locations, until the point of sale. With full inventory visibility and access to real-time updates on inventory levels, the vendor knows exactly when to restock the customer.
- Third-Party Logistics – The vendor and customer first decide on minimum, maximum and reorder points based on historical data. Then, the vendor stores inventory in third-party warehouses until the customer’s inventory levels approach their pre-set reorder points. At this point, the system automatically generates purchase orders, which the vendor oversees, and ships inventory to customers to keep them in stock.
The Bottom Line
It’s easy to see how vendor managed inventory practices drive real supply chain value for businesses. But is simply switching to a VMI program enough to improve your bottom line?
Remember: A VMI solution is only as good as the partners participating and the system supporting them. Choosing the right VMI system will set your business on the path to success.
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What disadvantages, if any, does Vendor Managed Inventory have?
Every business partnership carries some risk and a VMI relationship is no different. Specifically, it’s important to be aware of:
- The need for an airtight confidentiality agreement – Giving non-employees access to your company’s data or inventory may raise security concerns and can feel like a lack of control
- The value of a legally binding VMI contract – The tight collaboration and integration needed to make a VMI partnership successful can be difficult, and costly, to dissolve if things don’t work out
Can a VMI solution reduce lead times?
Long lead times are often the result of inefficient manufacturing and distribution planning. Extensive data sharing between VMI partners solves this problem by offering full supply chain visibility. Vendors can plan more effectively, cutting down on lead times and, in turn, shipping costs.
Is VMI a suitable solution for managing seasonal inventory?
As a customer shares more data, the vendor’s data analytics reach new levels of sophistication. Ultimately, the vendor can more accurately forecast changes in demand, and dynamically adjust inventories to improve supply chain responsiveness to seasonal changes, promotions, and other initiatives.
How often do vendors need to replenish their customers’ inventory?
Your VMI system will automatically generate purchase orders with the appropriate quantities to keep inventory levels at pre-set minimums and maximums.
Can vendors and customers both use Clear Spider’s VMI system to track and manage their inventory?
Absolutely–Clear Spider hosts their system on the cloud, making it accessible to both partners from anywhere, at any time. Seamless integration between Clear Spider’s system and other software ensures full supply chain visibility couples with easy and open communication between partners.