How to Implement Supplier Managed Inventory for Your Business

Supplier managed inventory (SMI) is a strategy that allows suppliers to monitor and replenish the inventory of their customers, based on the demand and sales data. SMI can help reduce inventory costs, improve customer service, and enhance collaboration between suppliers and customers. In this article, we will explain what SMI is, how it works, and what benefits it can bring to your business. We will also provide some tips on how to implement SMI successfully and avoid common pitfalls.

Key Takeaways

Supplier managed inventory (SMI) is a strategy that allows suppliers to monitor and replenish the inventory of their customers, based on the demand and sales data.

SMI can help reduce inventory costs, improve customer service, and enhance collaboration between suppliers and customers.

SMI requires careful planning and execution, involving choosing the right partner, defining clear roles and responsibilities, setting realistic expectations and objectives, starting small and scaling up gradually, and reviewing and improving continuously.

What is Supplier Managed Inventory?

SMI is a form of vendor managed inventory (VMI), which is an inventory management technique where the supplier takes full responsibility for optimizing and maintaining the inventory held by the retailer. The main difference between SMI and VMI is that SMI focuses on the supplier’s role in managing the inventory, while VMI emphasizes the retailer’s role in sharing the inventory data with the supplier.

SMI can be implemented in different ways, depending on the level of integration and collaboration between the supplier and the customer. Some common methods are:

The supplier is at the customer site. The supplier has a dedicated employee or team at the customer’s facility, who monitors the inventory levels and decides when and how much to order. This method is common in industries where there is a long-term contractual agreement between the supplier and the customer, such as automotive or aerospace.

The supplier periodically replenishes inventory during a site visit. The supplier visits the customer’s facility regularly and physically checks the inventory status. The supplier then replenishes the inventory according to the agreed-upon parameters, such as minimum and maximum stock levels, reorder points, or safety stock.

The supplier replenishes inventory based on data in the customer’s inventory system. The supplier has access to the customer’s inventory management system, such as MRP or ERP, and can view the inventory data remotely. The supplier then uses this data to plan and execute the replenishment orders.

Benefits of Supplier Managed Inventory

SMI can offer several benefits to both suppliers and customers, such as:

Reduced inventory costs. By allowing the supplier to manage the inventory, the customer can reduce or eliminate the costs associated with ordering, holding, and handling the inventory. The supplier can also optimize the inventory levels and avoid overstocking or understocking, which can lead to waste or stockouts.

Improved customer service. SMI can help ensure that the customer always has enough inventory to meet the demand, which can improve customer satisfaction and loyalty. The supplier can also respond faster to changes in demand or market conditions and provide better quality and delivery performance.

Enhanced collaboration. SMI can foster a closer relationship between the supplier and the customer, based on trust, transparency, and mutual benefit. The supplier can gain more insight into the customer’s needs and preferences, and tailor their products and services accordingly. The customer can also benefit from the supplier’s expertise and innovation, and access new opportunities for growth.

Tips for Implementing Supplier Managed Inventory

SMI can be a powerful tool for improving your supply chain performance, but it also requires careful planning and execution. Here are some tips on how to implement SMI successfully:

Choose the right partner. SMI works best when there is a high level of trust and alignment between the supplier and the customer. Therefore, it is important to choose a partner who shares your vision, values, and goals, and who has a proven track record of delivering quality products and services.

Define clear roles and responsibilities. SMI involves a shift in roles and responsibilities from the customer to the supplier. Therefore, it is essential to define who is responsible for what, such as ordering, replenishing, invoicing, reporting, etc., and establish clear communication channels and feedback mechanisms.

Set realistic expectations and objectives. SMI should be based on realistic expectations and objectives that are mutually agreed upon by both parties. These should include key performance indicators (KPIs), such as inventory turnover, fill rate, service level, cost reduction, etc., that can be measured and monitored regularly.

Start small and scale up gradually. SMI can be a complex process that involves changes in processes, systems, and behaviors. Therefore, it is advisable to start with a small pilot project that involves a limited number of products or customers, and then scale up gradually as you gain experience and confidence.

Review and improve continuously. SMI is not a one-time project but an ongoing process that requires constant review and improvement. Therefore, it is important to collect feedback from both parties, analyze data and results, identify issues and opportunities, and implement corrective actions or enhancements.

Tip

SMI can help you optimize your inventory management by letting your supplier take care of it.

Supplier Managed Inventory: A Global Trend

Supplier managed inventory (SMI) is an inventory management system in which the supplier is responsible for managing and replenishing the inventory of its customer. SMI is also sometimes referred to as vendor managed inventory (VMI).

Benefits of SMI

SMI has numerous benefits to both the supplier and the customer. One of the primary benefits of this approach is that it outsources inventory management. It is the supplier’s job to ensure that the inventory is always at optimal levels to satisfy consumer demand. This can eventually lead to:

Significant reduction in safety stock
Reduced probability of inventory deficit
Protection against lost inventory
Lower carrying cost (holding cost)

Since the supplier assumes responsibility for managing the inventory, customers can devote their resources to other business areas, such as business development and marketing. SMI can also benefit the supplier. Having access to a customer’s point of sale (POS) data allows them to gain valuable insight into the demand for their product, which can assist in sales forecasting.

Global Demand for SMI

According to a report by Research and Markets, the global SMI market size was valued at USD 4.08 billion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 7.6% from 2020 to 2027. The report attributes this growth to the increasing adoption of SMI by various industries, such as automotive, retail, healthcare, and aerospace, to improve operational efficiency and reduce costs.

The report also identifies some of the key factors driving the demand for SMI, such as:

The need for better inventory visibility and control
The rise of e-commerce and omnichannel retailing
The emergence of cloud-based and IoT-enabled SMI solutions
The growing focus on sustainability and environmental compliance

Some of the major regions that are expected to witness high growth in SMI adoption are North America, Europe, Asia Pacific, Latin America, and Middle East and Africa. The report also profiles some of the leading players in the SMI market, such as IBM, SAP, Oracle, Infor, Zebra Technologies, DHL, and JDA Software.

Frequently Asked Questions

What are the advantages of SMI over traditional inventory management?

SMI can help reduce inventory costs, improve customer service, and enhance collaboration between suppliers and customers, compared to traditional inventory management where the customer is responsible for ordering and managing the inventory.

What are the challenges or risks of SMI?

SMI can pose some challenges or risks, such as loss of control, dependency, information sharing, trust issues, or resistance to change, that need to be addressed and mitigated by both parties.

How can I measure the success of SMI?

SMI can be measured by using key performance indicators (KPIs), such as inventory turnover, fill rate, service level, cost reduction, etc., that reflect the objectives and expectations of both parties.

How can I choose the best supplier for SMI?

The best supplier for SMI is one who shares your vision, values, and goals, and who has a proven track record of delivering quality products and services. You should also consider factors such as reliability, flexibility, responsiveness, innovation, and compatibility.

How can I implement SMI in my business?

You can implement SMI in your business by following these steps: choose the right partner, define clear roles and responsibilities, set realistic expectations and objectives, start small and scale up gradually, and review and improve continuously.

Reference:

https://www.dea.univr.it/documenti/OccorrenzaIns/matdid/matdid982559.pdf

https://www.scmr.com/wp_content/e2open_wp_building_effective_vmi_020216.pdf

http://www.chainlinkresearch.com/media/docs/original/The%20Truth%20About%20VMI.pdf