Vendor Managed Inventory (VMI) is a business model where the buyer of a product delivers information to a vendor of that same product and the vendor takes full responsibility for maintaining an agreed inventory of the material, usually at the buyer’s consumption location.
It is also important to keep in mind that a third-party logistics provider can also be involved to ensure that the buyer has the required level of inventory by adjusting the demand and supply gaps. So, as you can easily understand, when you are using the Vendor Managed Inventory (VMI), it will be less likely that a business will unintentionally become out of stock of a good and reduces inventory in the supply chain.
The reality is that using the Vendor Managed Inventory (VMI) can bring a lot of benefits. If you think on the side of the vendor, you can then easily see that considering that the vendor is the one responsible for supplying the customer when the items are needed, this can then lead to lower inventory levels, removal of safety stock, and reduction in purchasing-related admin costs.
So, with the use of the Vendor Managed Inventory (VMI), the customer will be able to have significant safety stock since the supplier manages the resupply lead times. So, this obviously leads to huge cost savings.
Besides, it is also worth noting that the customer will also be able to take advantage of reduced purchasing costs. After all, the vendor receives data and not actual purchase orders. So, the purchasing department has to spend less time calculating and producing purchase orders.
Still in what concerns cos savings, this can also lead to lower inventories which means reducing the need for warehouse space and warehouse resources.
So, what about the Vendor Managed Inventory (VMI) benefits for the supplier or manufacturer?
The reality is that the supplier or manufacturer can also gain some benefits since they can access a customer’s point of sale (POS)data making their forecasting easier.
Besides, it is worth noting that manufacturers can also work their customers’ promotional plans into forecasting models. So, this means that enough stock will b available when their promotions are running.
Ultimately, Vendor Managed Inventory (VMI), when used correctly, is one of the best ways that you have to ensure that your customers have what they want, when they want. Besides, it can also help you keep your costs low.
While VMI has many benefits, it is also important that you understand that it has some drawbacks as well.
The truth is that when you opt for the VMI, you will need to allow a non-employee access to your inventory data and sometimes even your actual physical inventory. Besides, you will be allowing for a third-party to be responsible for your stocks instead of you. So, this brings some lack of control over your own business.
While there are many disadvantages of using VMI, one of the biggest ones is the fact that it can have an impact on sourcing. After all, on some occasions, supply chain managers will feel like they can’t find another source for a product that is being managed by a supplier they trust. So, if a supply chain manager relies too much on a single supplier, he may need to deal with higher prices, reduced quality or other supplier-related issues.