Vendor-managed inventory: a revolutionary way of managing your supply chain

How VMI is changing the classic supply chain model?

Retail businesses operate in a challenging, dynamic and rapidly changing environment. Technology is moving forward, customer demand is becoming more and more unpredictable and volatile, traditional supply chain models are often being disrupted.

To stay competitive retailers have to revolutionize their supply chains and upgrade inventory management strategies to ensure that their operational business processes are running smoothly and cost-efficiently.

Vendor-managed inventory (or VMI) is one of the modern models of managing inventory within a supply chain. VMI model is being successfully used by large international retail corporations, such as Walmart, P&G, Costco, and Amazon.

So, what is VMI?

Vendor-managed inventory

Vendor-managed inventory: definition

Vendor-managed inventory is a supply chain management model, where a supplier is responsible for stock counting, replenishment and stock keeping of the inventory stored at retailer’s sales location.

Under VMI model, supplier agrees to timely and accurately replenish inventory levels for the retailer, according to current demand trends. Put roughly, if you start operating under VMI model, your supplier will be responsible for keeping your retail store and warehouse stocked. So, when your store runs low on inventory, it is supplier’s responsibility to replenish it. 

VMI model is a cooperative partnership: a supplier takes care of stock replenishment (including shipping, delivery, customs clearance etc), while a retailer agrees to openly share inventory and sales data and empowers a supplier to make sovereign decisions on order time, quantity etc. 

What are the benefits of VMI?

✔️ Less time and effort spent on inventory management 

Each retailer knows that controlling inventory, calculating reorder quantities, and managing a delivery schedule may be a tough job, especially if you are not using a dedicated inventory planning software. Vendor-managed inventory concept can greatly decrease a workload for a retailer and decrease human resource costs.

✔️ Zero risk of running out of stock 

If you are using a vendor-managed inventory, you do not need to invest money into safety stock and you are safeguarded from running out of products. VMI works as an insurance package, where your supplier is being responsible for delivering goods to your stores and warehouses. 

Spending less on safety stock is very cost-efficient, and means having more money to invest into long-term development or new product lines. If you are holding less inventory, warehouse rental and expenses may be considerably decreased. 

✔️ Exclusivity and credibility

A VMI-partnership means exclusivity for both parties, as it is based on sharing and disclosing very sensitive inventory and sales data, as well as other operational and financial indicators. Working with VMI partner requires high degree of trust, credibility and transparency. Before reaching an agreement on VMI, parties usually conduct thorough business performance, credibility and due diligence checks - to be on a safe side and ensure that a new VMI partner is trustworthy, efficient and reliable. 

What are the drawbacks of vendor-managed inventory?

VMI system is not perfect, it has some pitfalls you have to consider before making a decision on entering a partnership on vendor-managed inventory. 

Risk of data security breach 

When you are working with VMI partner, you automatically agree to share and disclose your sensitive data, such as sales statistics, customer information, profitability, financial performance and other important indicators. This means you are relying your confidential information on other company’s security policies and standards. 

In case your partner company is hacked, your data will be revealed, and you will suffer losses and damage. Data breach is a very critical issue that may affect your company’s performance and reputation  

Risk of errors

Companies that use manual or outdated inventory management techniques may fail to correctly determine and calculate reordering quantity and reorder point. Sometimes it may just be a human factor. Anyway, we recommend you to choose your VMI provider carefully and pay due attention to the inventory management software the company is using. Automated inventory software will minimize human-caused errors.

Demand volatility

Sensing demand fluctuations in today’s volatile environment is a challenge for all retail businesses. Balancing supply and demand is a difficult task, and businesses no longer can rely their operations on a what-if-scenario. Modern retail business has no time to lose and have to analyze the challenges quickly and respond to them immediately. Especially those involved in VMI operations.

Companies dealing with VMI model need to have a strong inventory management system to quickly react to demand spikes or market uncertainty. Otherwise you may end up with delayed or unfulfilled orders, out-of-stocks and lost sales. 

Conclusions

VMI model is a modern supply chain scenario, with its pros and cons. If vendor-managed inventory system is transparent and fully functional, it may be quite a rewarding experience. 

VMI functionality greatly depends on the technology it is based on. Inventory management software can improve VMI performance by integrating data (from suppliers, retailers, distributors etc) into a single system, using advanced inventory planning and reordering techniques and ensuring data transparency and stability.

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