Vendor Managed Inventory

Vendor Managed Inventory (VMI)?

Performance improvements along the entire supply chain

An intact supply chain that can be flexibly adapted to market developments forms something like the backbone of a company. The ability to continuously increase operational value creation is closely linked to this. In practice, however, there are many factors that negatively influence or restrict the supply chain - with economic and organizational effects that in turn affect other areas.

With the help of a vendor-managed inventory, companies can significantly optimize their supply chain. The supplier plays a special role within the system, as they have access to valuable data from the respective company.

Vendor Managed Inventory explained: The supplier's direct access to the stock level

Let's take a look at the inventory management of a company that primarily sells items in large quantities. A vendor-managed inventory is not integrated; instead, many years of experience serve as the basis for inventory management. This means that supplies are ordered in regular cycles.

To make matters worse, the product can only be manufactured with the help of certain raw materials, which the supplier only has limited access to. Incoming orders are processed by date, true to the motto: first come, first serve.

The problem:

Increased demand, which may be well above average in certain areas, leads to supply bottlenecks (out-of-stock). These in turn can lead to cancellations, have a negative impact on the relationship with the customer and should therefore be avoided.

The solution:

A Vendor Managed Inventory (VMI) enables the supplier to be integrated into the warehouse management and order management system. The advantage is that the supplier can immediately see how stock and order backlog relate to each other. On the basis of the supplier-managed inventory (SMI), the supplier can cover the required delivery requirements on its own responsibility; an agreement regarding minimum and maximum stock levels would also be conceivable.

Vendor Managed Inventory offers these advantages for retail companies

Smooth communication between production companies or retailers and suppliers is not always guaranteed, but is essential for a vendor-managed inventory. Due to the lack of exchange, both sides also lack an understanding of what the other needs or is capable of achieving.

This not only results in higher process and procurement costs, but also makes it more difficult to plan stock levels to meet demand. We would therefore like to briefly outline the most important advantages of a Vendor Managed Inventory:

  • Reduction of process effort through real-time data exchange (with stock reconciliation)
  • Increased transport frequency leads to simplified warehouse management
  • Better transparency, which has an impact on the company's administrative expenses
  • Reduction of safety stocks that tie up valuable capital
  • Reduced effort for the disposition of the required goods
  • Demand-oriented inventory management in line with the respective demand situation

There is also an arrangement called co-managed inventory. Supplier and company share responsibility for inventory management. The company communicates its requirements and informs the supplier, who in turn creates an order list that has to be confirmed manually for approval.

Know and consider the weak points and risks of a vendor managed inventory

Naturally, there are risks for companies when they share sensitive data such as incoming orders with a third party. It therefore requires more than just a solid, trusting relationship between the two parties. Contractual regulations, especially with regard to ownership rights and payment obligations, should also be a focus when implementing a vendor managed inventory.

Other disadvantages:

  • Corresponding effort to establish an IT system for data exchange
  • Longer-term loyalty to a supplier due to high costs for conversion and switching
  • Risk of errors being multiplied due to manual input

Conclusion: Vendor Managed Inventory increases planning reliability and reduces costs

Stronger cooperation between retailers and suppliers, which is what vendor-managed inventory is all about, comes with a wide range of benefits. A constant exchange helps with peaks in demand, reduces unnecessary storage costs and enables price reductions due to a continuous supply of goods.

By simplifying processes, sources of error can be eliminated, customer wishes can be taken into account better and, above all, promptly, and production processes can be planned optimally. Vendor Managed Inventory improves the ability to react as a retailer, secures planning and gives companies a competitive advantage.


Logistik Lexikon Vendor Managed Inventory

Image: KAMONRAT / Shutterstock

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