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VMI: The benefits of the Vendor Managed Inventory

English

26 March 2020

Vendor Managed Inventory (VMI) is a business model. Is a process where the vendor creates orders from information provided by their costumers. And the vendor takes full responsibility by an agreement between the customer and vendor for maintaining an inventory of the material, fill rates and costs.

This arrangement can improve the supply chain performance by eliminating stock-out situations and reducing inventories. A third party logistics provider can also be involved. This happens to make sure that the buyer can adjust to the demand and supply gaps having a good level of inventory.

Benefits of Using VMI for the customer

Using VMI means that the vendor is responsible for supplying the customer with what they need. And this means that VMI removes the need for the customers to have a significant amount of stock (safety stock), that translates into: lower inventory levels.

Because the vendor receives data and not purchase orders, the customer can also benefit from reduced purchasing costs because they would spend less time on calculating and producing them.

In addition, the customer would also see a reduction in purchasing-related admin costs. How? Lower inventories can reduce warehouse costs when it comes to space and resources.

business woman inspector doing inventory VMI
Business woman checking the inventory

Benefits for the Supplier/Manufacturer

The supplier or manufacturer can also have benefits from the VMI. The supplier has more visibility when it comes to their customers’ inventory levels thanks to the access to a customer’s point of sale (POS) data.

VMI can help you to be able to ship on time. All because, when done correctly, it help suppliers to always have stock in hand for their customers. When they need it or want it.

This means that the supplier knows what has to be produced exactly when it’s needed and makes it is easier to ensure that stock-outs do not happen. VMI can also help you keep your costs down. Since you keep low levels of inventory and provide supplies and resupply when needed.

VMI and EDI

Thanks to the Electronic Data Interchange (EDI) that happens through the distribution channel thanks to the VMI, the vendor can specify delivery quantities that want to be sent.

The EDI transaction contains the sales and inventory information such as key product activity and forecast measures, such as: quantity sold, on hand, on order, received and forecast quantity.

The vendor reviews that information that has been received and make an order determination based on the agreement between the vendor and customer.

binary code software
Binary code software

VMI Software

A VMI software package can assist vendors in determining order requirements. The software can verify data and check if it is accurate and meaningful in order to calculate orders.

The software will verify if the data is accurate and meaningful. From here, it will calculate a reorder point for each item based on the data and any customer information. Then, the quantity will be compared with the reorder point for each item at each location and determine if an order is needed and the quantities required and when.

The document sent to the customer contains fields like: purchase order number, purchase order date, purchase order line item, quantity, price, item number and others.

In conclusion, the VMI’s role is a strategy of integrated supply chain that evaluates a more effective program to reduce inventory-related costs of the buyer-supplier channel. It also achieves this through optimizing shipments, snatch most of the short-term cast savings…

It’s a win-win situation for both the supplier and customer. But it is necessary for a good communication to exists between them. Knowing the details of inventory movements, seasonal spikes, changing selling channels… can lead to this win-win situation.

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