Vendor managed inventory (VMI) is an inventory management method in which a supplier or manufacturer is responsible for tracking, optimizing, and maintaining inventory levels for a retailer.
Businesses of all sizes take advantage of VMI to simplify their supply chain management, minimize stockouts, and cut down on lead times.
We’ll explain how VMI works, its advantages and disadvantages, and whether it makes sense for your business to use it.
In a vendor managed inventory system, the supplier (vendor) agrees to handle all aspects of their customer’s inventory, including ordering, stocking, and replenishment. In other words, the distributor exchanges their demand forecasting and inventory data for streamlined inventory management.
Unlike traditional inventory management strategies that require companies themselves to juggle purchase orders, warehousing, and transportation, VMI shifts those responsibilities to the vendor. Done correctly, VMI frees up time to focus on other aspects of the business.
VMI is a type of consignment inventory, which means the vendor retains ownership of the inventory until it’s sold to consumers.
A VMI system depends on suppliers replenishing the right products at the right time. Here’s how a successful VMI relationship works:
Now that we’ve covered the basics, let’s look at VMI in action.
Walmart is the master of VMI. With over 4,700 stores and 75 million SKUs, managing that inventory alone would be immensely time-consuming (and expensive). That’s why they’ve utilized VMI since the early 1980s.
Rather than devoting resources to managing all of their vendors’ products, Walmart gives those vendors direct access to data about their products at their stores. Then, it’s up to the vendors to determine the right time to replenish inventory. Under this model, Walmart can keep its shelves stocked while running lean.
Let’s look at three key benefits of VMI, whether you’re a big box retailer, an e-commerce brand, or a growing company looking for exposure at a retail chain.
When vendors know exactly how much demand there is for their products, they can accurately gauge how much inventory is being warehoused at any given time. That includes work in progress (WIP) inventory, raw materials inventory, and finished good inventory.
As a result, vendors can reduce their amount of safety stock which ultimately reduces carrying costs.
Since vendors are responsible for replenishing inventory at retail locations, their representatives can control how products are displayed and organized instead of leaving that up to retail employees.
For example, you might see a representative from Pepsi in your local supermarket, ensuring the brand’s products are displayed prominently and correctly.
In VMI systems, vendors get a granular look into their customers’ sales patterns and demand forecasting. This increased visibility lets vendors know how specific products perform in certain locations to make decisions about their production schedule and distribution based on solid evidence.
The same goes for QuickBooks Enterprise users, who can see in real-time how much inventory they have on hand or on sales order for each location. Enterprise also automatically calculates which items need to be restocked and generates purchase orders with one click. With the alternative vendor center, all of your essential vendor information is displayed in a central dashboard so you can made the right sourcing decisions at the right time.
Here are three ways VMI can give retailers a competitive edge.
Stockouts are bad for business—they hurt your bottom line and your relationships with customers). Unfortunately, they can happen even if you place purchase orders when inventory levels hit the reorder point.
However, a VMI system ensures that vendors have constant insights into inventory levels, so they know precisely when it’s time to replenish. After all, it’s in their business to keep their products on the shelves at all times to maximize their revenue.
Think about all the costs associated with traditional inventory management: stock counts, IT systems, not to mention the cost of carrying excess inventory onsite. With VMI, those costs are transferred to vendors so retailers can pad their margins and allocate their funds elsewhere.
The more time a company spends on inventory planning, creating purchase orders, and handling other inventory management tasks, the less time it has to think about high-level decisions. VMI takes much of the burden of inventory management off your team so you can devote time to other aspects of your business, like marketing or product development.
VMI can be a mutually beneficial strategy for vendors and retailers. But before you jump into a VMI agreement, there are some risks to consider.
VMI hinges on a vendor’s ability to assess inventory levels accurately, avoiding excess inventory or stock out. However, not all vendors have the infrastructure to do that. Before you initiate a VMI program, verify that the vendor has adequate resources and experience with analytics.
VMI requires two organizations to be deeply integrated. There are legal documents, shared data, and confidential information that bind the two parties together. The closer the organizations become entwined, the harder it can be to cut ties.
Whether you’re a vendor or a retailer, VMI only works if you share your data with the other organization. Electronic data sharing under any circumstance makes you vulnerable, so it’s vital to have an airtight non-disclosure or confidentiality agreement before you begin a partnership.
VMI requires diligent planning, but it can reduce costs and retain profit margins when all the pieces align.
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