7 Benefits of Vendor Managed Inventory for Your Business

Vendor managed inventory (VMI) is a supply chain practice where the supplier or manufacturer is responsible for optimizing the inventory level of the buyer or retailer. VMI can help both parties achieve better efficiency, lower costs, and higher customer satisfaction. Here are some of the benefits of VMI for your business:

Key Takeaways

Vendor managed inventory (VMI) is a supply chain practice where the supplier or manufacturer is responsible for optimizing the inventory level of the buyer or retailer

VMI can help both parties reduce inventory costs, improve service levels, enhance collaboration, increase flexibility, simplify ordering process, and gain competitive advantage

To implement VMI successfully, both parties need to share data, establish roles and responsibilities, set expectations and goals, manage conflicts or risks, and measure performance

1. Reduced stockouts and overstocks:

By having access to the buyer’s inventory data, the supplier can forecast the demand more accurately and replenish the stock at the right time and quantity. This reduces the risk of running out of products or having excess inventory that ties up capital and storage space.

2. Improved service levels:

With VMI, the supplier can ensure that the buyer always has enough products to meet the customer demand. This improves the service levels and customer loyalty of the buyer, as well as the reputation and sales of the supplier.

3. Lower inventory costs:

VMI can help reduce the inventory costs for both parties by eliminating unnecessary orders, transportation, handling, and storage. The supplier can also benefit from economies of scale by consolidating shipments and optimizing production schedules.

4. Enhanced collaboration:

VMI fosters a closer relationship and trust between the supplier and the buyer, as they share information and goals. This can lead to better communication, problem-solving, and innovation. VMI also aligns the incentives of both parties, as they work together to optimize the inventory performance.

5. Increased flexibility:

VMI gives the supplier more flexibility to respond to changes in demand, market conditions, or customer preferences. The supplier can adjust the inventory level, product mix, or delivery frequency according to the buyer’s needs and feedback.

6. Simplified ordering process:

VMI eliminates the need for the buyer to place orders manually or monitor the inventory level constantly. The supplier takes care of these tasks and sends automatic notifications or reports to the buyer. This saves time and effort for both parties and reduces errors and delays.

7. Competitive advantage:

VMI can help both parties gain a competitive edge in their respective markets by offering better products, services, and prices to their customers. VMI can also create a long-term partnership that enhances the value proposition and differentiation of both parties.

Tips

Choose a reliable and compatible supplier for VMI

Define clear objectives and metrics for VMI

Communicate frequently and openly with your supplier

Review and adjust your inventory strategy regularly

Seek feedback from your customers and employees

Vendor Managed Inventory: An Overview

Vendor managed inventory (VMI) is a supply chain practice in which a supplier of goods, usually the manufacturer, is responsible for optimizing the inventory held by a distributor or retailer. In this model, the supplier has access to the distributor’s inventory data and can make decisions on the order size and timing, while the distributor retains ownership of the stock and pays for the holding cost. VMI can benefit both parties by reducing the risk of stockouts, improving demand forecasting, enhancing collaboration and customer service, and lowering operational costs.

Global Demand for Vendor Managed Inventory

According to a market research report by Technavio, the global vendor managed inventory market size is expected to grow by USD 4.14 billion during 2021-2025, at a compound annual growth rate (CAGR) of 7.94%. The report identifies the following factors as the key drivers of the market growth:

The increasing adoption of VMI by e-commerce retailers, especially in emerging markets such as China, India, Brazil, and Mexico, where online shopping is booming, and inventory management is challenging.

The rising demand for VMI from the healthcare sector, where efficient inventory management is crucial for ensuring patient safety, reducing wastage, and complying with regulatory standards.

The growing need for VMI from the automotive industry, where complex supply chains, frequent product launches, and fluctuating customer preferences require agile and responsive inventory management solutions.

The technological advancements in VMI software and systems, such as cloud computing, artificial intelligence, machine learning, blockchain, and internet of things (IoT), which enable real-time data sharing, analysis, and optimization.

Challenges and Opportunities for Vendor Managed Inventory

Despite its benefits, VMI also faces some challenges and limitations that may hinder its adoption and implementation. Some of these are:

The lack of trust and transparency between the supplier and the distributor, which may result in information asymmetry, conflicts of interest, or contractual disputes.

The high initial investment and maintenance costs of VMI software and systems, which may deter small and medium-sized enterprises (SMEs) from adopting VMI.

The cybersecurity risks and data privacy issues associated with VMI, which may expose sensitive information to unauthorized parties or malicious attacks.

The legal and regulatory compliance issues related to VMI, which may vary across different countries, regions, or industries.

However, these challenges also present opportunities for improvement and innovation in the VMI market. Some of these are:

The development of trust-building mechanisms and incentive schemes that can align the goals and interests of the supplier and the distributor, such as revenue sharing, risk sharing, or performance-based contracts.

The adoption of cloud-based or software-as-a-service (SaaS) models that can reduce the upfront and operational costs of VMI software and systems, as well as provide scalability and flexibility.

The implementation of robust cybersecurity measures and data protection policies that can safeguard the confidentiality, integrity, and availability of VMI data.

The harmonization of legal and regulatory frameworks that can facilitate cross-border or cross-industry VMI transactions.

Vendor managed inventory is a promising supply chain practice that can improve inventory management efficiency and effectiveness for both suppliers and distributors. However, it also requires careful planning, coordination, communication, and evaluation to ensure its success. By addressing the challenges and leveraging the opportunities in the VMI market, both parties can achieve mutual benefits and competitive advantages in their respective domains.

Frequently Asked Questions

Q: What is vendor managed inventory (VMI)?
A: VMI is a supply chain practice where the supplier or manufacturer is responsible for optimizing the inventory level of the buyer or retailer.

Q: What are the benefits of VMI for the supplier?
A: Some of the benefits of VMI for the supplier are increased sales, reduced production costs, improved customer satisfaction, and stronger relationship with the buyer.

Q: What are the benefits of VMI for the buyer?
A: Some of the benefits of VMI for the buyer are reduced stockouts and overstocks, lower inventory costs, improved service levels, and simplified ordering process.

Q: What are the challenges of implementing VMI?
A: Some of the challenges of implementing VMI are sharing accurate and timely data, establishing clear roles and responsibilities, setting realistic expectations and goals, and managing potential conflicts or risks.

Q: How to measure the success of VMI?
A: Some of the key performance indicators (KPIs) that can be used to measure the success of VMI are inventory turnover ratio, fill rate, order cycle time, total cost of ownership, and customer satisfaction score.

References:

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

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

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

https://www.selecthub.com/inventory-management/vendor-managed-inventory-systems/

https://en.wikipedia.org/wiki/Vendor-managed_inventory

https://business.adobe.com/blog/basics/learn-about-vendor-managed-inventory

https://www.cips.org/intelligence-hub/operations-management/vendor-managed-inventory