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What is Vendor Managed Inventory?

August 7, 2019
Volodymyr Rudyi

Curious about what VMI actually is? The acronym stands for “vendor managed inventory” and defining it is relatively simple. VMI happens when a supplier is tasked with managing a client’s inventory.

A VMI solution can use data from the client to determine where inventory levels are. This can also be done through physical counting, but that takes longer. Once the inventory reaches a specific level, the VMI consulting company ensures that their client’s stock is replenished so they can sell goods to their customers.

Seem like a more straightforward concept than you thought? It is.

Why Vendor Managed Inventory Makes Sense

The reason that VMI is implemented in most cases is to increase efficiency and decrease costs for a client. Companies that offer VMI automation can typically manage inventory in a more effective manner than their clients can because their sole focus is keeping inventory at a certain level. So, the person offering VMI services is working to prevent sold out products while the client might have other metrics that take precedence over that. For instance, the client might consider customer service the most crucial goal, and that might change when they reorder products.

Because of this, sometimes clients rush their orders or make orders that can be confusing to vendors. However, with a VMI solution, the orders might be smaller and more consistent in order to hit inventory level targets. Since clients can have many different focuses, making errors with inventory is common. On top of that, clients might have many different orders, which makes it hard to manage inventory efficiently. When there is VMI in place, clients can focus on other metrics and be more successful overall.

How VMI Gained Popularity

While VMI has existed for a long time in various forms, it first became popular in the 1980s. This was a time when both Procter & Gamble and Walmart chose this method for their own products. Walmart has had tremendous results ever since implementing VMI. Using online software, vendors can look at inventory data around the clock. This gives them the option to replenish stock whenever they believe it is the best time. Walmart uses “key performance indicators” or KPI as a set of guidelines for vendors. Using VMI, Walmart is able to maximize profits while minimizing inventory.

The Benefits of VMI Automation to a Business

Inventory is essential to the success of any business. When you don’t have the right goods and parts available for customers, you risk alienating potential buyers. Despite that, not every business is capable of efficiently managed their own inventory to save money. The good news is that a VMI solution can help ensure that inventory is coming right on time. One of the best things about VMI automation is that you only get parts and goods when needed, not after and not before. Let’s look at the benefits of choosing VMI for your business.

Lower Inventory Cost Overall

You may not realize this, but having too much inventory and trying to store it all can be a considerable cost for any business. There’s no reason to have so much extra that it cuts into your profits. This is something that VMI consulting is built to help with. Instead of stocking up to the point of needing extra storage space, which costs money, your VMI automation solution helps cut down on inventory expenses. This means your business has more money for other things that might be important to invest in.

Manufacturing Footprint is Made Smaller

The floor space and shelf space that you use are valuable to your business. When there is too much inventory sitting around, that space is being used without pushing extra inventory. It may not even be needed in the near future for production needs. Adding on more storage adds to your overhead costs and should be avoided if it just means holding inventory that is there for no reason. On the other hand, when inventory is efficiently managed, the extra room can be used for different kinds of opportunities.

Reduction in Administrative Costs

When using a VMI solution, that means the business has less need to focus on things like issuing orders and maintaining purchase orders. All of this comes under the administrative umbrella, so taking it out of the equation can actually save your business money. When you don’t need to handle the purchasing on your own, and you remove all those follow-ups related to that, you can spend time on other things like product production and development. This can boost your business while taking something off of the table and making life easier for everyone.

Higher Level of Sales

When your inventory is handled using a VMI solution, you might find that you have the ability to carry a larger number of products and parts since there is plenty of room for it. When you have more products that customers want to see, that means you can make higher profits, offer lower prices, and spend time on other important aspects of the business like customer service. When you have customers that are happy, that can mean repeat business and a better level of success for your company.

Much More Reliable Delivery

When there is a VMI solution in place, the strategy requires for business and vendor to communicate on a regular basis to ensure everything is running as it should be. That communication might be in person, through email, over the phone, or a combination of all of the above. Unlike a traditional ordering system, VMI systems make your inventory delivery more reliable. You aren’t required to deal with the unpredictability that many believe is simply part and parcel with having a supply chain. With that hassle out of the way, you can focus on your customers and how to serve them.

Better Management of Inventory

When you have a VMI consulting partner in charge of your inventory, it makes your life easier in various ways. VMI automation can look at insights and data to plan what needs to be delivered more efficiently than you could on your own. It’s also going to make material requirement planning more accurate at the same time. What does this mean for you? Having access to better data can help your managers predict shifts in customer demand, which can create a more successful business.

Closer Partnerships with Suppliers

When you have a VMI consulting company assisting you, you have the chance to work very closely with them, which can benefit both of you. You are assured of getting timely, accurate delivery of products (often at a lower cost) while the manufacturer is able to schedule their workers and equipment in a way where they can ensure your products get there on time and aren’t as expensive as you would otherwise think.

Higher Level of Control Over Inventory

With a VMI solution, there is a requirement for well-timed shipments and precise inventory numbers. Because of that, product quality also tends to increase. If something comes in that isn’t up to snuff, it can be rejected and immediately replaced, so you don’t have to worry about running out of stock. Products that are no longer useful or which do not work will not be taking up space or costing you extra money with their storage.

Lower Chance of Customer Stock Outs

Having an understanding of your actual demand makes it more likely that VMI automation can have an awareness of your product launches, lead time, and packaging needs. This means that you are far less likely to be out of stock with something when you need it most. When you have better supply chain visibility, you need less safety stock, so you aren’t hanging on to parts and products that are never going to be needed.

The Benefits of VMI for a Vendor

The benefits of VMI aren’t only for businesses. They also translate to the vendors as well. One of the most significant benefits is that efficient production is possible using VMI strategies. Using lean manufacturing processes and making more frequent deliveries is a huge benefit for the vendor. In addition, with VMI, stock levels decrease, and stock shortages are less likely to occur. Vendors can immediately see that the inventory level is of a business to meet demand.

Using VMI can also help vendors create better relationships with their customers by offering high levels of customer service. VMI gives vendors a higher level of control, which can also reduce inventory costs. Having the ability to plan in advance allows vendors to eliminate high delivery costs and stock shortages while ensuring expedited orders get where they are going on time.

When to Use Vendor Managed Inventory Strategies

We mentioned that VMI consulting had been around for many years. It is one of the most important tools a business has for maintaining a lean supply chain and dropping the costs of storing inventory. If you own a business that needs to work on the costs of inventory management, VMI automation might be the right choice to do so. A lot of companies use VMI to ensure there is plenty of room in the warehouse for products and to keep inventory storage costs low. It also works quite well for companies that have a minimal warehouse or shelf space and want to use it the best way possible.

What Businesses Use VMI Automation

Think that VMI strategies aren’t for your business? The truth is that companies ranging from big-box retailers to restaurants, small retail establishments, and large manufacturing firms can use VMI to ensure they have all the needed products to do business. This solution will ensure your shelves aren’t stocked with unneeded items for more extended periods of time. A vendor keeps tracks of the inventory and then delivers what is needed based on that count.

It can also be used in more complex situations. For instance, a company that creates airplanes might purchase a bracket from a supplier who is located nearby. That supplier could be asked to keep track of the inventory bought, so brackets are only sent in manufacturing requirements require it. This allows for a less expensive manufacturing process.

With a large retail store, this strategy can be combined with others like innovative inventory management and cross-docking to ensure that products are always available when needed. This is what Walmart does and why it is such a great example of the possibilities of VMI consulting practices.

Situations Where Vendor Managed Inventory Fits Best

When a supplier is located near a warehouse or manufacturing facility that is also near the company making purchases, VMI is going to do its best work. This also explains why you can often see several suppliers who are all in one geographic location near a business. Using the aircraft example from above, these companies might include the bracket supplier, a tire manufacturer, and another company that creates sheet metal. Any of these can be set up to help with vendor managed inventory.

When using a VMI approach, companies need the ability to analyze their inventory to ensure both the purchaser and vendor have an understanding of what levels should be kept at all times. For small companies, that might mean just having an awareness of demand levels. Companies with more complex supply chains might need to implement inventory management applications which are shared with the supplier. This means that controls can be placed so the business costs are consistently where they should be while plenty of stock is available.

Choose VMI for the Success of Your Company

Saving time and eliminating the problem of errors with orders are only some of the great things that VMI automation can offer. The largest benefit is that your customers will appreciate it, even if they aren’t aware of it. Implementing VMI can take many forms, but it can change the entire landscape of your business. It may be the perfect solution to take your company to the next level.

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