Vendor Managed Inventory (VMI): Everything You Need to Know

Within the global supply chain, vendor-managed inventory (VMI) is becoming an essential service. Most people demand the movement of goods to be quick. That is why most retailers will opt for managed inventory to guarantee an increase in delivery rates. 

What is VMI?

VMI provided a streamlined approach to the supply chain process by providing inventory management and order fulfillment benefits to vendors and retailers. The vendors will manage materials and determine the order size. Both the supplier and retailer will share their demand and inventory information so that the vendor adjusts the delivery parameters.

Reasons for VMI as a Retailer

First, you won’t go out of stock. As a retailer, your vendors can manage your inventory and guarantee that you always meet your clients’ demands. The supplier can have information about how the products are selling and reschedule as to when they can make their deliveries. 

VMI system means that the suppliers will take the responsibility of ensuring that you always have stock. In return, this will improve inventory management. It will also appease your needs and those of your clients.

Secondly, you don’t have to worry about carrying costs. As a retailer, you won’t need to purchase products in bulk and store them in your warehouse. The vendors can access your inventory system and know when they need to restock. They have the responsibility of ensuring that your inventory doesn’t run out.

The supplier gets to know how much inventory to deliver and assists you in managing the inventory efficiently. In return, you’ll reduce your carrying costs since you will never get to carry excess stock.

Thirdly, you can spend most of your time growing the business. Since you don’t have to worry about the inventory, you can have ample time to sell and build the brand. The time gained can also help experiment with new product lines and find some new channels to sell your products on.

Reasons for VMI as a Supplier

When wholesaling, you get to gather information as to the demand for your products. You can set the supply forecasts and know when different retailers will need their inventory restocked. This will also help reduce the amount of safety stock that you might have in your warehouse.

You will also get to create some rapport with the retailers. Once a retailer is set on getting into VMI with you, it indicates that you can gain more information about their business. You can easily bind the retailer to your brand and focus on providing the best inventory management services.

Setting Up a VMI Program

After opting to use VMI in your business, you ought to know all the steps you have to follow. Having a plan ensures that the VMI program can be a success in your business. Also, it can guarantee that there can be a strong relationship between the supplier and the retailer. 

1. Is VMI the best option?

 Before settling on VMI practices, you need to know whether your business is on the right footing. Check your sales to see if it might be time to diversify and take more risks with the suppliers. Ensure that the supplier you pick will have the best employees who can adequately manage your inventory.

2. Set Information Transfer Platforms

VMI will only succeed if there is seamless information transfer. The supplier will require full access to inventory levels and sales data. From this, they can assess the information to know when to restock your warehouse. 

Properly managing the inventory requires the supplier to attain frequent forecasts from the retailers. Also, attaining the actual data of the inventory and sales will eliminate any hurdles. Furthermore, information transfer ought to apply to the supplier as well.

The supplier has to provide order status reporting to guarantee that the supplier has an update about their inventory. Using VMI requires both the supplier and vendor to be transparent with one another.

3. Maintain Open Lines of Communication

Creating a VMI relationship requires both parties to communicate with one another openly. The relationship is mutually beneficial, and this cannot be if no one is talking. In case there’s a breakdown of information, the results will all be negative.

Therefore, some of the reasons why communication is crucial will entail:

  • Being able to discern when demand changes and goods have to be delivered immediately.
  • The supplier has to notify the retailer of a delay in the delivery process of the inventory.
  • Any disruption in the supply chain might affect both parties.

To ensure that no issue with communication occurs, don’t let it be you. After all, you only have control over your communication and responses. 

4. Have Realistic Expectations

VMI can increase your chances of success. Take time to have honest and open discussions to understand everything that the VMI program will entail. You have to be realistic and open about your expectations. It will entail understanding that there will be some risks and benefits to both parties.

Discuss the expectations that both parties have from the agreement. It will assist in meeting all your needs and know what requires implementation and all the obstacles that might be along the way. Also, you should set a reasonable timeline for VMI implementation. 

As a retailer, you have to indicate how much safety stock the supplier has to have. After this, you can proceed to check whether there will be some inventory must-take terms. If there are slow-moving items, you should discuss the party that will take responsibility.

5. System Integrations

You need to know the different systems that will lead to successful VMI integration. Some of the systems to integrate will be the electronic data interchange (EDI) systems. They can assist in ensuring that there will be:

  • Reduced risk
  • Live access to vendor information
  • Fewer spreadsheets
  • Increased reliability 

Common Mistakes to Avoid

In most organizations, inventory is the biggest asset. Without proper management, this asset can turn into a large liability. Poor inventory management can derail companies from focusing on their growth to concentrate on emerging inventory problems. To prevent any loss in your company, here are some VMI mistakes to avoid. 

1. Failure in Delineating Demand Trends

Identifying demand trends is one way of ensuring that the business can become profitable. You have to invest in resources and systems that learn the customers’ preferences and demands. In return, you will not experience a shortage of stock or be left with tons of unsold stock.

Looking at trend analysis will assist businesses in knowing the upcoming trends. All of which can give you a competitive edge over the competition. If you don’t pounce at trend analysis, you risk your competitors having an advantage over your business. 

2. Failure to Adopt an ERP System

In the automation era, VMI has to function with the right inventory management systems. These systems will provide both parties with information about the inventory and sort out all the different errors that will arise. 

Using an ERP system, both parties will enjoy the integration options and fluidity that it can maintain. This allows for there to be a common database system that both parties can update automatically. With access to information for both suppliers and retailers, there will be no VMI hitches.

Since both parties can have dashboards to update all their information, it’ll be easier to interact and handle any inventory issues before they become dire. The retailer also attains information in advance as to the inventory that is in transit.

3. Incorrect Demand Forecasting

Demand forecasting is not the most reliable information for both the supplier and retailer. If the supplier attains a demand forecast, they will ship inventory according to the forecast information. On the other hand, a retailer might sell the products quickly or slowly.

Selling the products quickly means that the retailer will not have the inventory to satisfy the customers’ demands. If the products don’t sell quickly, the retailer might have tons of products in their warehouse. In return, it will increase their carrying costs. 

Instead of providing forecasts, the supplier and retailer ought to have systems that provide real-time sales and inventory numbers. The access and availability of information guarantees that the supplier will have correct information about the current inventory levels.

4. Lack of New Technologies

Embracing the available technology is one way in which businesses can move forward. With VMI processes, both parties ought to have the best technology to enhance proper communication. These communication channels guarantee that there can be better handling of the inventory.

New technologies also mean that it can be easier for both the supplier and retailer to access information from different places. The teams from both parties can communicate to ensure that there is proper inventory management.

Also, SaaS support allows the business to have some inventory management tools that will be efficient. A retailer can have different suppliers who can provide inventory once there is a decrease. It also allows both parties to have proper utilization of the warehouse space. 

5. Absence of a Common Database

 It’s crucial for both the retailer and supplier to share information. It’s the only way where inventory management will be efficient. With a good database, the supplier can easily track the retailer’s progress and know when to restock.

Therefore, a database has to be free of errors and ambiguity. On the other hand, the retailer must know of the inventory that’s in transit and be capable of tracking it. 

Types of VMI Models

VMI will cover many tasks within inventory management. However, VMI can vary depending on the needs of the different businesses and their supply chain strategies. Let’s look at the common VMI models. 

1. Synergized VMI

It’s ideal for small and medium companies since it’s efficient. The retailer and supplier will integrate their VMI software to automate the restocking process. They can also share information like forecasts, production schedules, and stock levels in real time.

2. Customer Orders Inventory

Here, the retailer will place the orders periodically. After this, the suppliers will follow this order and deliver the inventory when necessary. Such a system negates issues by ensuring that the products can always be readily available when needed.

3. Dedicated Supplier Space

Some retailers might opt to rent out their warehouses to the suppliers. The suppliers will, in return, stock the warehouse with the products that the retailer frequently sells. It’ll be up to the supplier to monitor their inventory and know when to restock. The system allows both parties to detect the demand for products and learn about whether they need to have any safety stock.

4. Supplier Physical Checks

For a small business, this can be common since it’s convenient for all parties. The supplier can show up, check the inventory levels, and restock immediately. The supplier organizes when they are to deliver any additional stock to the retailer. 

5. Inventory Planners

The supplier can opt to have an employee work in the retailer’s store and manage all their inventory processes. It’s effective since it can guarantee reliable information about the inventory. The supplier can also easily know about the vast array of products that the retailers might need. 

Choosing a Good VMI Software

To have the best VMI relationship, you need to know the different software solutions that will boost inventory management practices. These solutions ought to meet all your needs and guarantee some efficiency within the business. Here are a few tips for choosing a good VMI software. 

1. Success History

Consider checking the different achievements that software has had with VMI. You can easily learn about the success factor through some reviews from their previous and current clients. These success stories can provide you with valuable information as to the different VMI software solutions to consider. 

2. Adaptability and Customization

Most VMI customers will have unique requirements. You should seek software that can be tailored to satiate your business needs and adapt to all the changing situations. The software solution has to provide you with all the unique services that you require. 

3. Price

Don’t look for VMI software that you can’t afford. The base price isn’t the only determining factor when looking for the best VMI software. You have to consider the total cost of ownership to know whether the software can provide all the results that your business desires. 

VMI Success

For VMI measures to succeed, both parties, the retailer and supplier, ought to be on the same page. That is, they need to have agreements in place to guarantee that they can work together. Building a functional relationship allows the supplier and retailer to grow their businesses by supporting one another.

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