Vendor Managed Inventory (VMI)?
Performance improvements along the entire supply chain
An intact supply chain that can be flexibly adapted to market events forms something like the backbone of a company. The ability to continuously increase operational value creation is closely related to this. But in practice, there are many influencing factors that negatively affect or limit the supply chain - with business and organizational effects that in turn affect other areas.
With the help of a vendor managed inventory, companies are able to significantly optimize the supply chain. The supplier takes on a special role within the system, as he gains access to valuable data of the respective company.
Vendor Managed Inventory explained: The supplier's immediate 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. It follows that appropriate supplies are ordered in regular cycles.
The situation is further complicated by the fact that the product can only be manufactured with the help of certain raw materials, to which the supplier, for his part, has only limited access. Incoming orders are processed by date, true to the motto: first come, first serve.
Increased demand, which may be strongly above average at certain points, 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 must therefore be avoided.
A Vendor Managed Inventory (VMI) enables supplier integration with the warehouse management and order management system. The advantage is that the supplier can immediately see how inventory and orders are related to each other. On the basis of the supplier-managed inventory (SMI), the supplier can cover the required supply needs on his own responsibility; an agreement regarding minimum and maximum inventories would also be conceivable.
These are the benefits of vendor managed inventory for retailers
Smooth communication between production companies or distributors and suppliers is not always guaranteed, but is essential in vendor managed inventory. Due to the lack of exchange, there is also a lack of understanding on both sides of what the other needs or is capable of providing.
This not only results in higher process and procurement costs, but also makes scheduling more difficult in terms of inventory levels matching demand. We would therefore like to briefly present the most important advantages of a Vendor Managed Inventory:
- Reduction of the process effort through data exchange in real time (with reconciliation of the inventory)
- Increase in transport frequency leads to simplified warehouse management
- Better transparency, which influences the administrative effort of the company
- Reduction of safety stocks that tie up valuable capital
- Reduced effort for the disposition of the required goods
- Demand-driven management of inventory in line with the respective demand situation
There is also an arrangement called co-managed inventory. Supplier and company divide responsibility in terms of inventory management. The company transmits the demand and informs the supplier, who in turn creates an order list that still has to be confirmed manually for release.
Know and consider vulnerabilities and risks of a vendor managed inventory
Naturally, risks arise for companies when they share sensitive data such as incoming orders and purchase orders with a third party. Therefore, it requires not only a solid, trusting relationship between the two parties. The contractual provisions, especially with regard to ownership rights and payment obligations, should also be the focus of attention when implementing a vendor managed inventory.
- Corresponding effort to establish an IT system for data exchange
- Longer-term commitment to one supplier due to high costs for changeover and switching
- Risk of potentiation of errors due to manual input
Conclusion: Vendor Managed Inventory increases planning reliability and reduces costs
Stronger cooperation between retailer and supplier, which is what Vendor Managed Inventory is all about, goes hand in hand 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 requirements can be taken into account better and, above all, in a timely manner, and production processes can be optimally planned. Vendor Managed Inventory improves responsiveness as a dealer, secures disposition and gives companies a competitive advantage.