Vendor Managed Inventory (VMI): How It Works

Vendor-managed inventory systems provide a win-win situation for both customers and vendors. This platform is great because it allows the vendor to authorize inventories at customer locations and communicate with said customers t keep everything running smoothly.

Consignment customers with a low price point and who are not as valuable to the company might need more motivation than those with higher prices.

The content of this article is relevant to retailers.

What is a vendor-managed inventory (VMI)?

VMI Vendor-managed inventory is an approach to managing your stock that gives suppliers, manufacturers, and distributors the responsibility of handling all products in a retailer’s store. Click To Tweet

It means they are given complete control over what goods come into the store.

The three factors that make a VMI system

Vendor-managed inventory is characterized by three main factors that help distinguish this approach from other methods. The following are the qualities of a VMI system: 1) it’s driven by manufacturers, not retailers; 2) there is less investment in stock-keeping units (SKUs), and 3) fewer inventories will be required to cover demand because products can be made on-demand.

1. Vendor-controlled inventory management 

A VMI system is where the vendors control inventory rather than business owners. The idea behind this type of management style is that companies should leave ordering decisions up to their suppliers.

2. Vendor-controlled reordering and stock keeping 

With a VMI system, the vendor takes responsibility for monitoring inventory and ensuring that there is enough stock to go around. This can free up hours of time in the day for other tasks because it’s not necessary to monitor your supply.

3. Business and vendor information sharing

With a VMI system, it is necessary to maintain optimum inventory levels. This means that suppliers must be able to access information about the number of products left at different locations. This also entails supplying information on customer demand for manufacturers’ suppliers to plan their production.

Why do so many large businesses use VMI?

Vendor-managed inventory has been proven to be an excellent option for large businesses. It helps reduce costs and frees up warehouse space by eliminating the need to store overstocked items. More importantly, it is a good supply chain optimization because vendors ensure that customers have access to what they want when they want it.

Vendors can offer several benefits for you as the business owner, such as – Inventory management – Quick and easy ordering process – Less work on your end

Better relationships with suppliers

A vendor-managed inventory system is a partnership between the supplier and the customer. This relationship fosters healthy collaboration and an accurate flow of goods through the supply chain.

Less need for safety stock

With VMI, the need for safety stock is significantly reduced because suppliers are responsible for managing replenishment lead times. When a supplier notices that one of its customers has almost depleted its inventory levels, it can prepare to refill quickly and efficiently without disrupting production schedules.

Less upfront supply chain management 

VMI systems are a great way to ensure that the manufacturer takes responsibility for inventory management. The distributor or business will not have to worry about sourcing, reordering, and restocking because they trust the supplier with these responsibilities.

Reduced purchasing costs

Rather than relying on purchase orders to keep inventory, vendors can use their data collection methods. This reduces the need for any reconciliation or correction because no POs are needed.

Less inventory needed 

With VMI, the retail company has a better idea of coming in and out. As a result, retailers have less inventory to store because they are always aware of their stock levels. This means that there are lower costs for both short-term and long-term storage.

Easier forecasting for vendors

Demand forecasting is the best way to estimate future market trends and budget appropriately. Vendor-managed inventory allows suppliers to better forecast customer demand by accessing data from their point of sale system, which means that they can provide accurate forecasts for when stock will be depleted or enough items in storage.

Fewer stockout situations

A vendor-managed inventory system makes it easier to avoid stockouts because suppliers can see precisely when goods need to be produced. This means that they can, for example, restock products without interrupting the customer’s operations.

What does a vendor management system do?

A vendor management system allows vendors to control and replenish inventory at a customer’s location. The customers’ data, like the point of sale information or current levels for their lists, are used to create an individualized distribution plan developed by the vendor.

A VMI system is an incredible tool for businesses that use it to enjoy shorter lead times and improved customer experience. Walmart has been using a VMI program since at least 2009 to great success.

Five best practices for using a vendor managed inventory system

If you consider using a vendor-managed inventory system, consider some things before diving in. These five best practices will help your business and relationship with the supplier:

1. Openly share information with the vendor 

One of the most important things is to share information with your vendor. They can’t read minds, and they won’t be able to know what’s going on in our stock levels if we don’t tell them about it, so make sure you keep a constant flow of communication between us.

2. Keep vendors updated on seasonality 

When you work with a vendor to manage inventory, they must know about your seasonality. This way, the suppliers can prepare and make sure there are no stockouts of any SKUs.

3. Update vendors with any quick changes in demand

When your sales are unexpectedly low, you need to let vendors know about the situation not to overstock their stores with goods. If a particular product is losing its appeal quickly or not selling at all, it should be communicated to manage supply accordingly.

4. Negotiate fees upfront

You want to avoid surprise fees down the road by negotiating upfront. Still, if you do run into any unexpected charges, it will be easier for your business because of these negotiations.

5. Establish specific goals for your business

The first step to entering into a VMI agreement is understanding what you want from the relationship. Establishing clear goals will help evaluate whether or not the vendor’s expectations align with your own.

How to use VMI alongside Skubana

One of the most important things to manage inventory is using a vendor-managed inventory system. Skubana can be used for more effective business operations and growth for those who are already doing this.

Body, a large wholesaler in the retail industry, needed to find an inventory management software that could work seamlessly with their Amazon and Shopify channels. Skubana’s API-driven system quickly answered Boldifle’s questions about how it would integrate into their existing systems while also offering unlimited customizations.

Boldify body that Skubana is an excellent platform for salespeople, account managers, and other people in the company. Make sure to schedule a demo with them today!

Conclusion

The Vendor Managed Inventory (VMI) model is not the right fit for every eCommerce business, but it might be worth looking into if you are considering one. It can help build rewarding relationships with your suppliers and offer a higher level of service than what would otherwise be possible when managing everything yourself.

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 cannot handle the added responsibility.

Vendor-managed inventory allows a business to outsource the responsibility of managing its inventory. Click To Tweet

This could be advantageous for businesses that do not trust themselves to decide what and how much they should order or if their vendor is unable to handle more responsibilities.

• What are the benefits of vendor-managed inventory? Some of the essential advantages 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.

One of the essential benefits of VMI is that it allows businesses to reduce inventory levels, freeing up time for other, more beneficial activities. For example, they can spend less time buying products and focus on product design or marketing.

• What is the bullwhip effect? The bullwhip effect occurs when retailers react to an increase in demand for their product, even if it is temporary, which causes a ripple effect throughout the supply chain. Retailers expect the growth to be the norm, so they order more products, which causes distributors and manufacturers to increase their distribution and production.

A bullwhip effect is when a retailer reacts to increased demand for their product, even if it’s temporary. They expect the increased sales will be sustainable, so they order more products from distributors and manufacturers, which causes them to ramp up production.