What Is Vendor Managed Inventory?

Learn about:

• What vendor managed inventory is
• The benefits of VMI to both retailers and suppliers
• How to implement VMI

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Vendor Managed Inventory (VMI) refers to a process wherein the entire onus of the supplier’s inventory falls on the manufacturer or source. If well-done, it can prove to be an efficient way of reducing costs and avoid unplanned overstocking. 

What is Vendor Managed Inventory (VMI)?

Vendor Managed Inventory is like the auto-fulfillment schedules for printers. When a consumer buys a printer, he or she can register with the brand to have replacement ink delivered when the need arises. 

When, for example, a consumer permits the printer company to access the printer’s data, the manufacturer can ship the customer ink before it runs out. This subscription service helps reduce the hassles of managing ink levels and purchasing more.

How does Vendor Managed Inventory benefit retailers?

Prevents stock exhaustion

Stock in short supply can significantly affect the quality of retail service and result in dissatisfied customers, leading to lost sales. VMI can reduce stock exhaustion and prevent replenishment issues or shortages.

Increases availability and, therefore, sales

With the supplier managing inventory and orders, retailers are better able to maintain instocks and on-shelf availability. Having more products available increases sales and customer satisfaction, thereby increasing repeat buyers.

Reduced carrying costs

The VMI method reduces carrying costs by allowing retailers to order the exact quantities they need from suppliers. VMI decreases excess stock, thereby lowering the costs associated with safety stock.

More time to spend on growth

With Vendor Managed Inventory, retailers are free to spend more time growing their business and less time managing inventory and creating purchase orders. VMI is a method for the supplier to replenish stock as it sees fit.

How does Vendor Managed Inventory benefit suppliers?

Fine-tunes supply according to demand

Using VMI allows suppliers to ship their products to their customers according to the supplier’s demand plan, without relying wholly on the retailer’s forecast. The supplier can make better decisions based on its historic sales and consider such factors as seasonality and viral marketing efforts.

Builds bonds between the supplier and the retailer

VMI allows suppliers to build stronger bonds with their retailers by ensuring that suppliers ship their products on time. Many retailers have stringent compliance programs, such as Walmart’s On Time In Full (OTIF) program and Kroger’s Original Requested Arrival Date (ORAD) initiative. Suppliers may experience steep fines or even ejection from stores altogether.

Reduces the bullwhip effect

VMI helps reduce the bullwhip effect by allowing suppliers to better forecast inventory needs based on their data. Suppliers with advanced insights into their historic sales, growth opportunities and plans, and marketing efforts better understand what product needs to go where.

Room for growth without having to worry about old stock

VMI places the control of the supply in the supplier’s hands, allowing the supplier to grow without worrying about having obsolete stock on its retailers’ shelves. Suppliers can more easily phase out discontinued items based on the schedule they set.

How to implement VMI in 4 simple steps

There are four steps to begin a VMI program:

1. Become Better Acquainted

The first step to commencing a VMI program is to elevate the vendor-customer relationship to a whole new level of trust and agreement. To initiate the VMI process, the parties involved must share a great deal of proprietary information ordinarily confidential.

Once the supplier and retailer have evaluated their relationship, they can create a path to the transparent and candid transfer of information. They must share such information as forecasts, demand plans, and supply plans, and how they align with immediate and long-term goals. 

2. Create a systematic and well-documented supply chain

Changing to a VMI program is more effortless if the retailer has a systematic and well-documented inventory management system. The supplier, too, must implement a clear supply chain free of kinks. Suppliers should ensure they can ship their products as expected by the retailer.

3. Get inventory data ready

VMI implementation depends on a continuous flow of reliable inventory information, from the available supplies to the demand fluctuations across time. Assembling accurate data with actionable insights will serve the retailer as well as the vendor. The supplier should ensure that data is flowing freely between it and its customer.

4. Define objectives and implement an order process

The versatility and receptivity of a VMI program enable more stringent deadlines and eased general inventory at the retail level. To achieve this, the supplier must establish its replenishment process based on the customer’s goals and forecasts. Setting up VMI is simpler after all the participants have clarity in historical sales and future demand.

Examples of VMI

• The vendor is at the customer location and determines the order’s quantity. In this instance, the retailer still does the practical ordering and processing of the inventory.
• The vendor is at the customer location, and the inventory is at the disposal of the vendor. The vendor determines when to place the order, and the customer takes charge of the stock once it arrives.
• The vendor is away from the customer location, and the vendor has inventory at the customer location. In this instance, the vendor regularly analyzes (either from a different location or personally) the current stock and replenishes the inventory as and when required. This example of VMI is a form of consigned inventory.
• The vendor is away from the customer location and outsources inventory management to a third party. The vendor also keeps the inventory in the third party’s warehouse. The warehouse is in charge of distributing the inventory.

The standard VMI process

When the retailer requires a product, it can place an order with a supplier. The customer must be in charge of the schedule and volume of the placed order, according to one of the discussed instances. The customer manages the inventory plan.

The supplier gets the electronic data (usually EDI or online) that informs the supplier of the customer’s sales and stock levels. The supplier may see each commodity that the customer carries, along with the point of sale (POS) data. 

Creating and maintaining the inventory plan is the supplier’s responsibility. With VMI, the supplier – not the customer – comes up with the order to refill the inventory.

The start of Walmart VMI

Walmart owes its sprawling enormity to VMI. It is how Walmart manages to keep its racks filled in 4,000 outlets throughout the U.S., accounting for around 142,000 individual SKUs in each store.

To put it mildly, this is a formidable task. Walmart is a connoisseur in the art of VMI.

During the 1980s, the retailer began to engage upfront with manufacturers, entrusting suppliers with the task of taking care of inventory in their warehouses. This practice gave birth to something known as vendor managed inventory or VMI.

Walmart’s inventory management now channels POS data, distribution center inventory, and online sales into a centralized data repository, Retail Link. The data is accessible for all suppliers so that they know when to transport more commodities.

Walmart’s VMI model

Walmart models its vendor managed inventory by beginning with shared inventory and sales data. Walmart gives its suppliers insights into forecasted and historic sales in Retail Link. Armed with this data, suppliers can make decisions about where and when to send their products.

Walmart supervises and regulates an order’s shipment from the distribution center to the store. The retailer stocks its shelves every night to ensure that products are readily available at all times.

To sum up, vendor managed inventory benefits both suppliers and retailers by creating a more cohesive relationship between the two. VMI increases compliance and instocks while reducing carrying costs of excess inventory.