Although the concept of a vendor managed inventory system is one that is unknown to many people, it is a very popular and common means of optimising the performance in the supply chain, as the manufacturer holds responsibility for maintaining the inventory levels of the distributor. Its not really a revolutionary concept, but it is one which works exceptionally well.
Vendor Managed Inventory is typically stored at point of use with the customer, but ownership does not pass until the item is either consumed or “drawn upon”. At its most basic level, the buying and selling organization share inventory data. The buyer retains the responsibility for generating and sending all the purchase orders with the selling organization receiving a series of messages relating to what the buying organization has consumed, what stock levels they currently have and so on.
Using this information, the seller can then make the decision about what stocks to replenish. It is actually a very simple system and one that works well. Because the seller can view all the stock that the buyer has, he can create and then maintain the inventory plan.
Benefits to Buyers
The seller aims to improve fill rates with regard to stock, which will then increase flow and ensure that the end customer will receive their orders in a way that is effective and efficient.
Because stock is managed effectively the buyer does not experience items being out of stock on such a regular basis and there is also a significant decrease in terms of the inventory held, which means that the inventory is more cost efficient.
The buyer also gains an advantage through passing all the costs of inventory planning and ordering to the manufacturer, thereby reducing operational costs.
Service levels are improved by the right product being available at the correct time, so there is little wastage within the process.
The buyer benefits through the manufacturer being more focussed on the service that they provide.
Benefits to the Manufacturer/seller
Because the seller is able to access the buyers data relating to point of sale, they are able to forecast demand in a comprehensive manner, which ensures good logistics in terms of inventory management.
Stock levels that are held by the buyer are highly visible so there are fewer errors within the process which means that the manufacturer is more able to meet customer demands.
The seller can help prioritise the demands for the stock levels. Theseller can actually anticipate demand before it may even be apparent to the buying organization.
There are significant benefits available to both the manufacturer and the buying organizationn
First of all, the speed of processing orders tends to become more efficient and there are fewer data entry errors generated because of the collaborative communications between the two.
One key benefit is that there is a real mutually beneficial partnership between the two parties; they need to work together and they need to be mutually respective of each other.
This is important because the relationship has to be strong for it to succeed, but luckily there is a mutual interest in it succeeding, because if it doesn’t then there can be effects in terms of the inventory management. So there is a definite incentive for this to work out!
This is a kind of advanced procurement system that is based on an equal relationship between the distributor and the manufacturer. Although historically there was a relationship of one party being more in control than the other, this VMI is a very balanced relationship.