Vendor-Managed Inventory (VMI) is a planning and management system that is not directly tied to inventory ownership. Under VMI, instead of the customer monitoring its sales and inventory for the purpose of triggering replenishment orders, the vendor assumes responsibility for these activities. In the past, many suppliers operated vendor-stocking programs where a representative visited a customer a few times a month and restocked their supplies to an agreed-upon level, also known as min/max. Now, suppliers can monitor sales of their products and decide when to initiate the resupply procedure.
There are many benefits of VMI inventory control:
- Ensures inventory is in stock when needed
Daily demand-data alerts the supplier when inventory falls below order point calculations and restocking can happen quickly and seamlessly. This ensures inventory is in stock when needed and not before… or too late. - Improve customer service
Receiving timely information suppliers can better respond to customers' inventory needs in terms of both quantity and location. - Reduce demand uncertainty
Constantly monitoring customers' inventory and demand stream, the number of large, unexpected customer orders will dwindle, or disappear altogether. - Reduce inventory requirements
Knowing exactly how much inventory the customer is carrying, a supplier's own inventory requirements are reduced since the need for excess stock to buffer against uncertainty is reduced or eliminated. - Reduce costs
To mitigate the up front costs that VMI demands, it is suggested that manufacturers reduce costs by re-engineering and merging their order fulfillment and distribution center replenishment activities. - Improve customer retention
Once a VMI system is developed and installed, it becomes costly for a customer to change suppliers. - Reduce reliance on forecasting
Customers running VMI programs eliminate their need to forecast. - More focus
Customers running VMI programs can turn their focus to what they do best, manufacturing their own goods or services. In turn, this offers a better quality product to the customer. - Overall service level is improved
Customers running VMI programs can focus more on their own product, In turn, this offers a higher quality product and service to the customer. - A true partnership is formed between the Manufacturer and the Distributor
Both companies work closer together and strengthen their ties. This benefit of a stronger partnership goes beyond VMI.
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