Vendor Inventory Management (VMI): Definition, Benefits and Example

Ngoc Lee
Vendor Inventory Management (VMI): Definition, Benefits and Example
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Business nowadays is difficult to forecast and frequently involves competition. Current inventory management techniques, as well as the inventory management software that supports them, have grown in value and demand as storage methods have improved and organizations have gained a competitive advantage. 

Vendor-controlled inventory falls under this category and is an excellent technique to keep a company's day-to-day operations functioning smoothly. Buyers and sellers agree to share a little amount of risk in exchange for a much larger gain in vendor-managed inventory. It's a win-win situation when done correctly. Here's what is vendor inventory management definition, how it works, and why it's so advantageous to two parties at once.

What does VMI (Vendor Management Inventory) mean?

Vendor-managed inventory (VMI) refers to a supply chain arrangement in which the manufacturer or supplier takes control of the seller's or retailer's inventory management actions including managing, maintaining, and optimizing their inventory. 

👉 Read More: What is Inventory Management? How Does it Work? 

In other words, this indicates that the upstream agency is in charge of the downstream agent's inventory. Managed inventory, continuous replenishment plan, or supplier-assisted inventory replenishment are all terms used to define this type of vendor management inventory agreement.

VMI (Vendor Inventory Management)
 VMI (Vendor Management Inventory)

How does a VMI System Works?

VMIs are those that are owned by the vendor but are kept on the premises of the buyer or retailer. It's a type of consignment inventory in which a merchant entrusts their inventory to the protection of others while holding ownership. So, how does a vendor-managed inventory system perform? Here's how it works with a vendor-managed inventory system:

  1. Both the vendor and the buyer agree on what success is defined in their VMI partnership in terms of objectives and key metrics. Inventory turnover rate, in-stock performance, and transaction fees are common examples.

👉 Read More: 15 Vendor Management KPIs You Should Know 

👉 Read More: 20 Important KPIs For Inventory 

You Need to Notice Other terms of the contract will specify whether the buyer will pay for the inventory when it is acquired or when it is sold to the end-user. Also, how will surplus inventory be returned?

  1. The vendor delivers inventory to the buyer or retailer
  2. The vendor keeps track of the buyer's or retailer's sales patterns and stock levels for their items.
  3. The vendor does the task of reordering and replenishment values based on demand predictions and the lead time.
  4. The VMI specialist or the planner of the vendor assesses the calculations and then makes the replenishment orders.

Vendors who know the time to replace their purchasers' inventory have strong VMI partnerships. The key to this is for purchasers to share their sales and demand prediction information with their vendors.

When Is VMI (Vendor Management Inventory) Most Effective?

In general, for a strategy to be successful, it must include a large number of use cases and functional situations. VMI solutions work efficiently when the inventory supplier has a warehouse or production facility close to the customer. That's one of the numerous reasons why production suppliers tend to cluster in places with a big client base.

For example, an airplane manufacturer may be adjacent to inventory suppliers such as a metal sheet maker, tire supplier, or bracket manufacturer. Businesses that use this method of managing inventory should be able to do depth research on their inventory needs before approving a vendor. The buyer must do careful research in order for both parties' stock levels to be in sync. 

Additionally, this also aids users in determining how much inventory needs to be held and allowed access to the stock supplier's warehouse in order to efficiently meet demand. Small businesses with basic supply chains may not have too complex inventory requirements that change primarily in response to predictable demand patterns. Mid-size and large-scale businesses with a complicated supply chain, on the other hand, may require vendor management inventory or ERP software to assist them to manage their operations.

What are The Advantages and Disadvantages of  VMI ?

Why would a vendor be in trouble for controlling the inventory of another company? And why would a buyer surrender ownership of one of their most valuable assets, their inventory? The vendor inventory management system is a win-win situation for both suppliers and buyers when done effectively. VMI offers considerable cost savings in inventory management that benefit both parties.

The advantages of vendor management inventory to the buyers

 How buyers benefit from VMI
  • VMI reduces risks. Purchasers do not need to invest as much (or as little) in inventory that they are unlikely to sell.
  • There will be no more cash flow limitations. Inventory isn't paid for until it's sold, thus money isn't locked up in sitting inventory. And/or vendors apply all of their analytical skills to restocking, ensuring that inventory is well controlled and optimized.
  • Reduce inventory levels. You may be assured that because suppliers face the risk of goods not selling, they're aware of overstock and potentially outdated or expired goods. That implies they'll take the safe route and opt for smaller stock levels and more frequent deliveries.
  • Reduced carrying costs. Because you minimize all of your extra stock and reduce the expense of holding and maintaining it, reduced inventory levels equal reduced carrying costs.
  • Less safety stock or not at all. Tons of money and effort is invested in safety stock and buffer stock. However, they are also risky.

When your supplier gets control of the inventory management system, they'll be able to integrate your information with their expertise in lead times to remove the need for excess inventory.

  • Minimize inventory shrinkage. Inventory shrinkage is an inherent element of doing business. You'll suffer less shrinkage if you maintain fewer goods on hand.
 Minimize inventory shrinkage
  • There will be fewer or no stockouts. It's in a supplier's greatest interest to maintain customers satisfied, or else they'll go elsewhere.

You can reduce the uncertainty around periodic random and ordering by ensuring fluid, consistent replenishment using a vendor-controlled inventory system. Because your vendors have done it before, they will always know how to balance lead time and demand.

  • Budgeting, ordering, and inventory management expenses reduce since they are all delegated to the vendor, supplier, or manufacturer.
  • Increase value and brand loyalty thanks to daily contact with vendor personnel, and product awareness among staff development. Of course, this does not apply to MRO inventories.

The vendor management inventory benefits the vendors and suppliers

 How vendors and suppliers benefit from VMI
  • More management over product presentation, organizing, and branding in-store.
  • Ability to leverage in-store sales skills, resulting in increased sales and brand loyalty.
  • Reduces the bullwhip effect's magnitude. Which is a situation in which, as you move up the supply chain, material orders rise contrary to demand fluctuations.
  • Product demand forecasting that is accurate. Vendors may predict inventory demands and client orders by having visibility into sales trends, stock levels, and demand forecasting.
  • Carrying expenses are reduced. You'll determine how much of your production inventory (work in progress inventory, raw materials stock, or complete stock on hand) is in your warehouse at any one time if you have a better grasp of your products' demands. Then you can cut the level of in-transit stock and safety stock in the pipeline.

What are the Disadvantages of Vendor Managed Inventory?

VMI has certain drawbacks, such as requiring non-employee access to data sets and, in some cases, real physical inventory. You're also looking for a third party to keep your inventory at the optimized levels, which can be unsettling for supply chain professionals. Nevertheless, one of the most significant disadvantages of VMI is its influence on sourcing. Supply chain professionals frequently believe they won't be able to locate another source for a product managed by a reliable supplier. 

If a supply chain management relies too heavily on a single supplier to manage its stock, he or she may have to accept higher pricing, lower quality, or other supplier-related difficulties. Multiple sources for a product controlled by a supplier may also be challenging for supply chain professionals at times. 

As a supplier, once you can win the loyalty of customers and demonstrate your capacity to improve your customer's inventory utilizing VMI, you can be sure that you will be the product's long-term supplier. When there is no VMI effect, it is tough enough for supply chain management to participate in a sourcing operation. A VMI that is well-run makes re-sourcing not only difficult but also a low priority.

Vendor Management Inventory Examples

Now, let’s see a vendor-managed inventory example below! Spring Home, a fictitious home improvement shop, is used in this vendor-controlled inventory example. Assume Spring Home is a retailer of Fryst portable door locks. Fryst has a VMI deal with Spring Home. Spring Home constantly delivers Fryst data about their portable door locks sales patterns and inventory levels through EDI or online. 

Fryst examines their lead times and calculates replenishment based on this information. Fryst's inventory specialist evaluates the figures and places all of Spring Home's replenishment orders. Spring Home and Fryst's effective and lucrative partnership is dependent on correct information being shared on a regular basis. It is the only way to run a vendor-managed inventory system successfully.

What is the definition of a Vendor Managed Inventory Software System?

Vendor-managed inventory software also referred to as supplier-assisted inventory or continuous replenishment programs, aids businesses in order fulfillment and optimizing the inventory management process. Both sides share data in this type of system in order to improve consistency. Vendors, on the other hand, have the right to teach and educate their staff and associates about their inventory and how to use it.

 Vendor Managed Inventory Software

Key Features

It may be challenging for a company to find out the software with a set of the finest features, especially when you've never utilized a solution before (it'll be even more overwhelming). We've compiled a list of typical VMI features to make the process easier. Aside from this, you may seek other features that are tailored to your company's needs.

Forecasting Demand

One of the critical features that VMI systems provide is the ability to estimate the exact demand for products. They assist in the projection of demand for goods that need to be produced, packaged, and dispatched quickly. It brings together the information to specific units from different companies making up your client base, allowing for more informed supply chain planning. Besides, the software also assists in identifying any underperforming stock-keeping units and preventing overstocking in the warehouse or retail store.

Management of Inventory

You can keep track of data on the items your company stores, buys, produces, or sells. The application also allows for appropriate pricing and helps keep stock levels at optimal levels all the time. Serial and lot tracking should also be included in a robust supplier-managed inventory system.

Data Exchange

VMI solution enables data and material interchange inside an organization as well as between customers, clients, and corporate partners. Customs and tax details, inventory records, purchase orders and receipts, delivery and order status, and other information are included.

Integration of E-commerce

A VMI system that interfaces with various online shops, shopping carts, as well as e-commerce platforms are available. Inventory levels, methods of payment (including both cash and digital), and transportation modes and options will all be streamlined as a result of this solution. Companies can utilize warehouse management software or other stock control system to handle all items sold through a specified e-commerce shop. 

👉 Read More: Top 10 Vendor Inventory Management Software in 2023

 Integration of E-commerce

The Bottom Line

Now that you're aware of the numerous advantages of implementing a vendor inventory management system, you can go on to find software that meets your specific needs. A tip to make things easier is that you should create a list of goods that match needs that are critical to your business's operations. We hope this post has provided you with a comprehensive view of what vendor inventory management is and how it can benefit your business. 

Be aware of the limitations or obstacles that this inventory management system may have, and carefully evaluate how to set up and maintain VMI at your organization. You've found this article so helpful? Let's forget to follow our Fanpage and website to get many interesting articles!

Ngoc LeeNgoc Lee is an Content Creator Manager at EFEX. She wields her long-term expertise in Logistics and Supply Chain, harnessing her top-notch writing and research skills to bring incredibly valuable content. Whether you're a small startup or a well-established enterprise, Ngoc Lee is here to equip you with the essential knowledge of e-commerce, fulfillment, and all things business-related.