Many bigger businesses depend on vendors and suppliers to manage their warehouses and anticipate their restocking needs. This is an arrangement known as “vendor managed inventory,” or VMI. Whether you’re a retailer or supplier, a VMI system is a viable way to streamline daily operations in your business.
How VMI Benefits the Supply Chain
The goal of VMI is to ultimately be a mutually beneficial system for both retailers and suppliers. The same core elements of warehouse management are still present, but the direct responsibility of this undertaking shifts to the vendor. Below are some of the main benefits to both parties.
Benefits to Retailers
As a retailer, it can be cost prohibitive to maintain all of your own inventory needs efficiently. You may be limited by physical storage space, lack of revenue, or may find yourself in a growth phase where you are not yet prepared to handle the full suite of logistics. Having to go through the process of creating, submitting, and reconciling purchase orders may waste valuable time and cause delays in fulfillment — or simply tax limited resources. With that in mind, the VMI supply chain system can help retailers:
- Reduce or eliminate sold-out items, ensuring the retailer doesn’t lose sales. Running out of stock gives rise to unhappy customers, potentially driving some away for good.
- Eliminate the need to internally track each individual SKU in-store, freeing up time to focus on growing the business, and leading to more strategic initiatives.
- Avoid stockouts because a supplier was low on inventory when a purchase order was made, forcing the retailer to look for new suppliers.
- Reduce carrying costs by optimizing inventory levels and ensuring they don’t carry too much inventory at one time. Retailers will also be able to avoid over-ordering merchandise with a short shelf life just to reach a supplier’s minimum order amount.
- Reduce uncertainty and improve supply chain predictability. By meeting with suppliers and sharing data, retailers will become more informed and able to predict future needs.
Benefits to Suppliers
As the manufacturer, vendor, supplier, or distributor, you may be reluctant to take on the responsibility of inventory planning and management for your customers. While VMI may take some effort to get started, the method can provide certain benefits to suppliers, such as:
- The opportunity to secure long-term customers. By offering VMI, suppliers are taking on more work and costs in the short term, but are also entering into a long-term agreement to gain access to operations information and data. Retailers will want to stick with suppliers they can trust with that information, as well as depend on to provide the benefits listed above.
- Providing a steady flow of income and reducing the risk of customers forgetting to order or trying out different vendors.
- Allowing for a more predictable operations schedule via monitoring of the customer’s inventory, forecasting their needs, and adjusting supply operations as early as possible.
Keep in mind that for any of these benefits to take place, the retailers and suppliers have to work together to drive the success of the VMI system.
The Importance of Coordination and Communication
Support of the VMI process requires regular review and calculation of order quantities based on shared data, including special information like sales and promotions. For this to be successful, and to avoid backorders and missed sales, retailers must be diligent in ensuring clear and open lines of communication with vendors. Vendors must also set clear expectations from the beginning of the relationship. Incorporating a warehouse management platform that other applications (like accounting software or an e-commerce platform) can integrate with seamlessly may help facilitate this information exchange and allow vendors and retailers/buyers to work together more effectively.
The Supply Chain Resource Cooperative of NC State University outlines three essential steps to making a VMI supply chain work:
- Set clear expectations. Before entering an agreement to manage a customer’s inventory, the supplier should ensure expectations are understood to avoid any disappointment from short-term results. Most likely, suppliers will feel short-term strain on their operations and bottom line after taking on the added responsibility.
- Agree on how information will be shared. For any supplier to successfully manage their customers’ inventory, they need necessary information shared with them in a timely manner. Ensure the retailer is prepared to share forecasts and production schedules on a regular basis.
- Keep communication channels open. Retailers and suppliers should meet regularly to set goals, discuss steps to reach those goals, and evaluate progress. Both parties should also be prepared to tackle any problems that may arise in the supply chain together.
Communication is a crucial component to a successful VMI system. Any changes in project management, supply chain logistics, or customer needs must be communicated from retailer to supplier as soon as possible to avoid backorders, extra inventory, or unhappy customers.
Likewise, suppliers must communicate with their retailers often as well. If demand surges and their resources are stretched thin, they should let their customers know that they will have less flexibility for a period of time. Any of these potential bumps in the road can be prevented with clear and open communication, as well as effective planning and preparedness.