Vendor managed inventory (VMI) is a physical products business model where suppliers take responsibility for managing their customers’ (buyers’) inventory levels. This system involves the supplier having access to their customers’ physical inventory, which enables them to monitor and replenish stock levels when necessary.
The primary goal of VMI is to eliminate the need for the buyer to monitor and replenish their inventories. Suppliers provide VMI as a value-added service to the buyers, typically to maintain expense items or “C” class items that are a nuisance for a buyer to maintain. This strategy leads to lower inventory carrying costs and less shrinkage while increasing your fill rate and rate of return (ROR).
Curious about implementing VMI in your business? It may appear complicated at first glance, but with a full understanding of modern strategies and tools, you can leverage it relatively quickly. Continue reading to learn the essentials of VMI, a few examples, and the steps needed to begin VMI.
Vendor managed inventory is a supply chain management model that allows suppliers or vendors to monitor and manage their customers’ inventory levels. In this system, the supplier is 100% responsible for meeting the demands of their customers’ inventory replenishment.
Suppliers accomplish VMI by either:
VMI is a mutually beneficial system that helps both suppliers and buyers by optimizing inventory levels, reducing unnecessary expenses, mitigating or eliminating lead time, and streamlining profitability.
The simplest example of VMI is the industrial distribution industry. Major industrial suppliers such as Graybar and Gexpro Services use VMI to ensure that they replenish customer stockrooms in an optimized way where the customer doesn’t carry too much inventory but also doesn’t stockout.
The supplier sends technician drivers to customer stockrooms to monitor the bins of inventory and do orders or cycle counts to determine replenishment levels. Surprisingly, many suppliers still use clipboards and spreadsheets for tallying replenishment needs. Fortunately, there are now mobile apps that can greatly increase the efficiency of VMI replenishment by helping users scan QR codes of inventory bins and input orders or cycle count quantities. Then the apps send the information digitally to the supplier for fulfillment. The driver then brings the parts back to the customer on his next trip.
Suppliers are responsible for keeping the right amount of inventory on hand to meet customer demand, but not too much so that customers don’t accuse the suppliers of “bin stuffing”. This system allows buyers to reduce labor costs associated with counting inventory, while ensuring that their shelves are always stocked with the correct items.
The VMI system involves a close relationship between a supplier and their buyer. The system begins with the supplier having access to the customer's inventory, which allows them to determine when replenishment is necessary.
The supplier is responsible for ensuring that the customer has the required inventory level to meet their demand. The supplier then ships or hand-delivers the products to the customer as per the schedule in their written agreement.
This system is beneficial for both the supplier and the customer. For the supplier, it reduces the risk of stockouts and helps them optimize their inventory levels. For the buyer, it simplifies or eliminates the need to pay for the labor required for manual inventory management and ensures they always have the required inventory level to meet their demand.
There are several benefits to implementing VMI:
VMI software is one crucial component of any VMI system. This software enables suppliers to monitor each of their buyers’ inventory levels on a weekly or bi-weekly basis, set min/max levels, track usage, optimize inventory levels, and make accurate replenishment decisions accordingly. The software also allows suppliers to track their performance metrics, such as inventory turnover and delivery schedules. Data that only includes order information can be “lumpy” less dependable for making decisions on what optimized min/max levels should be. Only sophisticated min/max AI analytics can turn this lumpy data into actionable recommendations on what the optimized mins and maxs should be. The software your team uses should be scalable and customizable to meet the requirements of both your goals and those of your buyers.
eTurns TrackStock software is a market-leading VMI (and CMI) solution that automates the VMI process for stockrooms and trucks. TrackStock works with a wide selection of IoT technologies you can use to track inventory usage, including: QR code scans, electronic shelf labels, SensorBins, and RFID digital kanban. eTurns TrackStock even has plans in 2024 to allow for inventory tracking with SupplyPro vending machines. Each of these methods saves time over labor-intensive manual methods of tracking inventory. TrackStock sends digital purchases orders to any supplier and optimizes your inventory levels and min/max inventory management through our Min/Max AI Analytics Dashboard.
A VMI agreement outlines all of the terms and activities that both the buyer and supplier will commit to for the duration of the agreement. An effective VMI agreement includes details such as the inventory stockrooms that the supplier will have access to, the frequency of replenishment, and the metrics that will be used to measure performance.
VMI agreements may last anywhere from six months to one year or longer, depending on the level of trust and congruence between both parties’ goals. Many strong supplier-buyer partnerships extend their agreements based on positive results.
Using VMI in your company requires a large amount of diligent planning. We’ve outlined the nine steps any supplier or buyer can follow to begin a profitable, smooth VMI experience here:
You now have the essentials of VMI and know its basic functions within most business applications. Perhaps you’re wondering more about your specific industry and the benefits you can anticipate as soon as you implement it.
We did the heavy lifting by looking for the most commonly asked questions about VMI and providing our answers below.
The purpose of VMI is to reduce as many inventory-related expenses as possible for both suppliers and buyers. Inventory is expensive to ship, unpack, store, monitor, and replenish so businesses are happy to lower expenses wherever they can. VMI automates some aspects of inventory management and eliminates others, producing a streamlined way to meet the needs of both parties.
Both suppliers and buyers utilize VMI to reduce recurring costs and simplify their operations. As far as industries that utilize VMI, they include the following:
All parties throughout a given supply chain benefit from vendor managed inventory. When a supplier has data directly from their buyers, they can rapidly predict the right amount of raw materials to order, what timelines to operate on, and whether to increase or decrease production. Without VMI, suppliers may carry more safety stock than they need, and buyers may order more than is available from their supplier.
With VMI and optimization analytics, suppliers optimize their ordering timelines from their raw material providers, and buyers don’t have to worry about under- or over-ordering. End customers benefit too, because the retail environment has the products they need, when they need them.
The team at eTurns can help you to implement a VMI system that is tailored to your specific needs. Try our software free for 30 days and overhaul your inventory operations with remarkable simplicity. Got questions? Contact our team now and we’ll be happy to help.
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