What is vendor managed inventory?

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The bigger your business gets, the tougher it can be to stay on top of everything. One of the last things you’ll want to be concentrating on are inventory levels and product reordering. Fortunately, a vendor managed inventory strategy can go a long way in maintaining a steady stream of inventory and ensure that your products are always in stock.

So, what exactly is vendor managed inventory? How can you convince your suppliers to take on the responsibility of maintaining their inventory in your store? What are the advantages and disadvantages to a VMI solution?

In this article, we shine a spotlight on vendor managed inventory and discuss its pros and cons so that you can decide whether or not it fits in with your business and strategy. 

What is vendor managed inventory? 

Vendor managed inventory (VMI) is not a new concept, but it’s one that many retailers still have yet to adopt as part of their business strategy. When executed correctly, however, a vendor managed inventory strategy can bring big benefits to your business. 

A VMI program is where the retailer (buyer) shares information with a supplier (vendor) and the supplier maintains an agreed inventory level of a particular product.

In other words, once inventory levels reach specific reorder points, your suppliers will replenish your stock on your behalf. 

Why might you want to investigate a vendor managed inventory solution? 

For starters, the traditional inventory management model is challenging in a few ways:

  • Limited visibility into whether or not your supplier can fulfill your order
  • Accuracy of your forecast is limited, risking buying too much or too little
  • You buy and own the inventory, regardless of whether you sell it

Such traditional approaches can force you into buying too much inventory to prevent stock outs, in turn causing you to carry excess stock and increasing your inventory holding costs.

In comparison, a vendor managed inventory strategy resolves these issues by sharing the burden of inventory management between the retailer and the supplier. 

Retailer benefits of vendor managed inventory

Eliminate the risk of stock outs

With a VMI strategy in place, retailers eliminate the risk of stock outs.

You no longer have to reorder products at the last minute and don’t have to worry about whether or not your supplier has the ability to restock without interrupting your business operations. 

What’s more, the supplier can better prepare to replenish stock as he or she can start scheduling its own production and distribution of a reorder.

Removal of safety stock

A vendor managed inventory solution removes the need for the retailer to maintain a significant amount of safety stock as the supplier manages the resupply lead times. 

It goes without saying that lower inventories can lead to big cost savings for retailers.

Find out how to calculate your safety stock level.

Decreased costs

Ecommerce retailers using a VMI system may also benefit from a reduction in purchasing-related admin costs.

As the supplier receives data and not purchase orders, the purchasing department is likely to spend less time on calculating and producing product orders. 

Increased sales

A vendor managed inventory strategy can increase your sales by ensuring that your products are always in stock and available to purchase. 

It’s likely that consistent product availability will boost the quality of your customer service and help foster brand loyalty. As a result, this means more returning customers and sales.

Less responsibility

The bigger your business gets, the harder it is to keep track of inventory moving in and out.

A vendor managed inventory can play a big role in deferring responsibility. It can lower costs, reduce admin work and allows staff to focus their efforts on growing your company.

Improved customer experience

With a VMI solution in place, you can be sure you’ll always have the right amount of stock. 

Ensuring that there is a steady stream of inventory can create a better experience for your customer base. Your customers can rely on you to get their products from.

Such positive experiences can encourage repeat purchasing and evoke brand advocacy. 

What’s more, with closer relationships to your manufacturers and suppliers, you are better able to answer product-related questions. A VMI solution helps retailers share this information with customers thanks to the business relationship.

Supplier benefits of vendor managed inventory

Long-term business relationships

With vendor managed inventory strategies in place, suppliers benefit from long-term relationships with retailers whose inventory they manage – with or without a contract.

This produces a predictable income for the supplier and a strong relationship greatly reduces the risk of the customer switching suppliers suddenly.

VMI suppliers are more likely to become more valuable suppliers, which in turn increases strategic communication and provides major benefits for both parties. 

Here’s a list of tips to help you manage supplier relationships more effectively.

Increased productivity

As the supplier is now responsible for monitoring its customer’s inventory on a regular basis, it’s more than likely that its operations will become more productive. 

Further improvements will be achieved once the supplier develops a better understanding of how the retailer uses its products throughout the year. 

Reduce inventory costs

With a VMI system, suppliers benefit from more control than before. Therefore, they can eliminate wastage, non-value adding factors and other costs. 

In addition to this, accurate planning can cut the cost of storing excess inventory and reduce the likelihood of obsolete stock.

More specifically, suppliers can eliminate the risk of stock shortages as well as the high delivery costs to ship expedited orders.

Improved forecasting ability

A vendor managed inventory solution brings together the supply chain, giving the supplier direct access to the retailer’s inventory and sales data.

The advantage to this is that suppliers are better equipped to predict how many products they need to manufacture, helping to reduce wastage and other costs. 

More accurate ordering and fulfillment

Making sure that that the order fulfillment process is accurate and correct can be a challenging task for suppliers. In traditional supply chain relationships, ordering and fulfillment can be rife with errors. 

However, with a vendor managed inventory in place, many of the risks are vastly reduced. Much of this is to do with the fact that the process has been digitized.

As the computer systems can talk directly with one another, the only mistakes that may be made will be when a human employee interferes or enters incorrect data. 

Disadvantages of vendor managed inventory

Sharing of confidential data

One of the main disadvantages to implementing a vendor managed inventory strategy is that retailers will have to be comfortable enough to share sensitive data with suppliers.

This includes giving a non-employee access to your inventory data and sometimes your physical inventory. 

While this sharing of data is necessary to use a VMI solution, some retailers may find that the perceived lack of control to be unnerving. 

Difficult to change suppliers

Another potential disadvantage to using a vendor managed inventory is that you may find yourself in a position where you feel like you can’t find another source for a product that is currently being managed by a supplier that they trust. 

Due to the close relationships that are developed between retailers and suppliers when a VMI solution is used, retailers can sometimes become too reliant on the third-party. 

As such, they may choose to live with price hikes, reduced quality or other related issues. 

Unexpected changes in demand

If there are sudden and unexpected changes in customer demand for your products, you may find that your supplier is unable to schedule production or delivery in a timely manner.

That means less inventory is available for you, and therefore less sales.

Such a spike in demand may also create issues for the supplier, as he or she will need to prioritize its production plans or inventory from customer to customer. 

To prevent this from happening, the best thing you can do is maintain regular communication with your suppliers. Any unexpected demand changes need to be shared with the supplier immediately. 

How to make vendor managed inventory work

Clarify expectations

In order to make the VMI strategy work for the long-term and to the benefit of both the supplier and the retailer, expectations should be set from the outset.

Make sure that your objectives are clear and communicated regularly. 

If you choose not to sit down and discuss what both of you expect from the agreement, you may find that the VMI program comes to an end fairly quickly and no side benefits. 

Agree on how to share information

For a vendor managed inventory agreement to be a success, both parties need to agree on how you will share information with one another.

If the supplier and retailer agree to share the data needed to ensure product restocking happens in a timely manner, a synchronized system will improve business for both sides. 

The retailer needs to ensure that they provide the following information:

  • Enough information to maintain a steady flow of products
  • Production schedules
  • Sales and demand forecasts

Keep communication channels open

When it comes to a successful vendor managed inventory scheme, perhaps the biggest necessity is regular communication. Without discussion, it’s likely that a VMI strategy won’t work properly or will breakdown quickly.

After initial meetings and objectives have been set, both sides need to understand that there is likely to be small errors that will need ironing out.

These errors should be looked at as opportunities for learning and enhancing the strategy and can be used to avoid repetitive problems in the future. 

Vendor managed inventory is a win-win

When executed correctly, a vendor managed inventory strategy is a win-win for both the retailer and the supplier involved. 

It ensures that you, as the retailer, are never out of stock or that you end up carrying too much excess stock as a result of inaccurate forecasting.

Of course, there is a fair amount of shared risk, as retailers relinquish control over a key part of their business and suppliers take on more work to maintain their inventory levels. 

Regardless, a VMI solution is an effective way to manage product reordering, stock and inventory levels. It saves countless man hours and ensures that operations are run far more productively and smoothly.

Find out more about Linnworks inventory management software.