What Is Vendor Managed Inventory?

Vendor Managed Inventory, also known as VMI, is a mutually beneficial business relationship between a buyer and a vendor, where the vendor is responsible for maintaining agreed upon inventory levels for the buyer. While nuanced variances within the VMI family exist, standard rules of engagement for a VMI relationship include a buyer that openly shares data with the vendor and a vendor who agrees to replenish or optimize inventory at the buyer’s designated location.

Walmart: The King of Vendor Managed Inventory

In the early 1980s, Walmart partnered with Proctor and Gamble to test VMI. At the time, VMI was a new and novel concept, but not widely practiced. More than thirty years later, Walmart continues to openly share data from both its inventory levels and its sales through numbers to its vendor community. Any research into a VMI strategy will quickly reveal that Walmart has long been hailed as the master of VMI. Walmart is so effective with its VMI strategy that its distribution costs are typically less than 2% of its sales—roughly 50% better than other retailers.

Whether it’s Proctor and Gamble, or a smaller vendor on the Walmart line card, Walmart puts inventory fulfillment responsibility in the hands of its vendors. Vendors receive inventory and sales data, and are then left to determine the appropriate rates to refill Walmart’s inventory. From Walmart’s perspective, it is in the vendor’s best interest to optimize distribution in a manner that keeps Walmart’s shelves stocked with the vendor’s product. From the vendor’s perspective, the data it receives from Walmart provides key insights into how certain products are selling and the vendor can manage production and distribution accordingly.

In Walmart’s VMI strategy, all costs associated with inventory management are transferred to vendors. This includes headcount, IT systems, and other resources that would dramatically drive Walmart’s costs up if Walmart were to bear such costs.

Good for Retailers and Vendors Alike

A key element of a VMI strategy is the symbiotic relationship for both parties involved. In the Walmart example, Walmart is a retailer of tens of thousands of vendors. While this is a large number of relationships to manage, and it might not seem obvious to share sensitive data with some many different entities, Walmart benefits from its transparency because the costs of inventory management are largely handled by the vendors. Walmart can take comfort that each vendor will optimise its distribution channel so that inventory through Walmart stores is replenished as needed.

Vendors also benefit from a VMI strategy. As mentioned, Proctor and Gamble was Walmart’s initial partner in the VMI strategy. Proctor and Gamble continues to implement a VMI strategy, and Walmart has become Proctor and Gamble’s largest retailer. However, you don’t have to be Proctor and Gamble, with a huge line card of products, to benefit from VMI.

Consider your last trip to a convenience store. Whether that store was a large chain, or an independent small business, you’ve most likely seen vendor reps stocking shelves. Vendors of all shapes and sizes can benefit from a VMI relationship with retailers. The vendor gains increased visibility into the sales channel. The vendor can better forecast production rates because of the direct access to sales data from the retailer.

The vendor also reduces the potential for supply chain errors. Often, purchase orders are completely eliminated as the vendor simply keeps inventory stocked as needed. Additionally, inventory mix is not the problem it traditionally is for retailers because the vendor can make the decision directly based on sales data. These vendor benefits apply across the board, whether you are a multi-billion dollar enterprise (e.g. Coca Cola, Kimberly Clark, etc.), or a small independent brand trying to achieve market exposure through a retail chain.

Vendor Managed Inventory for Small Businesses

We know it works for Walmart, Proctor and Gamble, Coke, and other household names, but does VMI provide value to a small business? The answer can be “yes”, if executed properly.

Consider the restaurant industry. Many restaurants are small, independently owned businesses. Regardless of restaurant type or size, inventory is critical. The inventory most likely includes numerous vendors (e.g. bread, meat, vegetable, cleaning supplies, disposable utensils, etc.). Additionally, most of the inventory is perishable with a limited shelf life. To top it off, the restaurant industry is notorious for its low net margin. These specific restaurant industry elements leave little room for extra costs. If a restaurant can lower overhead costs by outsourcing inventory management to its vendor partners, it could be the difference that makes or breaks a restaurant.

Is VMI Right for Me?

Companies of all sizes, across industries have seen success with VMI. But, how do you know if VMI will work for you? You need to take a close look at your business and your relationships to businesses you rely on before jumping to a VMI strategy. Here are five questions to help evaluate whether or not VMI might be a fit:

1. Do you have an established working relationship with your partners?

Open, cooperative communication is key to successfully implementing a VMI strategy. If you don’t have an established trust with your partner businesses, it will be difficult to launch a successful VMI strategy.

2. Will VMI mutually benefit both parties?

While a VMI strategy might help reduce the cost of your inventory management (if you are the buyer) or increase your visibility into sales (if you are the vendor), you must determine whether there is a measurable, expected benefit to your partner business. If not, it might be difficult to get both parties to fully buy into the strategy, which could lead to a disappointing rollout.

3. Are both parties’ expectations aligned?

While the overarching concept of VMI includes a vendor managing inventory for a buyer, the operation of VMI varies widely from case to case. Will the vendor be responsible to track and place orders, or will the vendor physically replenish inventory at store locations? These two scenarios have drastically different operational requirements from the parties.

4. Do you have the IT infrastructure needed to adequately share information?

Data sharing is key to a mutually beneficial VMI strategy. Not only must the buyer share its inventory and sales data, the vendor must be able to receive and analyze such data. Specific IT resources are needed to ensure the appropriate data sharing.

5. Do the parties have the resources necessary to implement and maintain a VMI strategy?

The end goal for a VMI strategy is to increase efficiencies and reduce costs. However, both parties must have resources available to ensure the systems are put in place to launch a VMI relationship, and to ensure that its success is tracked so adjustments can be made.

Since Walmart and Proctor and Gamble set VMI on its path to worldwide adoption over thirty years ago, VMI has become so widespread that software programs and consultancy agencies now exist with the sole purpose of implementing VMI strategies. VMI can certainly reap benefits through efficiencies and cost reduction, but realizing such benefits takes planning, resources, and evaluation.