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A Guide to Vendor-Managed Inventory

Learn how vendor-managed inventory processes improve supplier-retailer collaboration, resulting in increased sales and strong supply chain management.


A recent study reveals companies and businesses across industries should anticipate supply chain disruptions lasting about a month to happen every 3.7 years.

In the case of food and beverage goods, supply chain disruptions, like the recent one caused by COVID 19, can have a massive impact on business, including revenue loss and loss of customer trust. A great way to minimize or eliminate your exposure to these risks is by utilizing vendor-managed inventory (VMI).

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What Is Vendor-Managed Inventory?

Vendor-managed inventory is a supply chain agreement where a supplier manages and optimizes their inventory while it is in possession of the retailer. In fact, the supplier is authorized to manage inventories at the retailer’s location. With VMI, the inventory is replaced for the retailer without them having to initiate the purchase order. Point of sale data informs the supplier, allowing them to correctly assess order frequency and size and take steps to fill orders and minimize stock out situations and inventory carrying costs.

How Vendor-Managed Inventory Works

The first thing to remember about vendor-managed inventory is that it is owned by the supplier but is located at the retailer’s premises. It is a type of consignment inventory where a vendor bequeaths their inventory to the care and maintenance of another while still retaining full ownership. The following is a summary of how vendor managed inventory systems works:

  • Step 1: The vendor and buyer strike an agreement on their VMI relationship. These agreements usually include the goals and metrics defining the success of their partnership. They may also agree on whether the retailer pays for inventory on acquisition or after a sale. 
  • Step 2: The supplier will then ship the inventory to the retailer’s premises.
  • Step 3: The supplier monitors, and optimizes the sales patterns and inventory levels of their products at the retailer’s premises. They can then determine the reordering and replenishment calculations depending on demand forecasting and lead time.
  • Step 5: The supplier, together with their team of VMI specialists and planners, reviews the calculations and other metrics before placing the replenishment orders.

For the VMI relationship to be successful, both the supplier and retailer have to play their roles well. The supplier has to know when to replenish their retailer’s inventories. Similarly, the retailer has to share accurate and timely sales and demand forecasting data with their vendors.

The Benefits of Vendor-Managed Inventory

Managing inventory at the enterprise level is an ongoing battle that comes with its own share of challenges. Specifically, demand projections and fluctuating costs can make this task quite challenging. However, a strategic VMI relationship between suppliers and retailers can reduce these pain points. 

The following are the main benefits of VMI:

Fewer needed resources 

One of the main benefits of vendor-managed inventory is that you can reduce resources dedicated to inventory management. If you have less staff or limited storage, letting suppliers manage inventory is a great way to cut down on expenses. Additionally, because you control customer inventory in the VMI relationship, you achieve greater efficiencies with little resources.

Cost reductions

Having too many inventory stocks at your disposal can be costly as they take up precious space on your shelves. On the other hand, running out of stock can trigger disruptions and lost sales. However, you will have fewer orders, less expensive rush orders, and no overstocks with vendor-managed inventory. VMI ensures you strike the right balance to guarantee the reduced cost of inventory, better utilization of shelf space, and enhanced customer satisfaction. 

Improved efficiency

Vendor-managed inventory comes with organized systems that improve supply chain efficiency. Ideally, VMI arrangements leverage robust warehouse management software to automate processes and streamline operations. Software can accurately predict customer behavior and forecast seasonal peaks so that you adjust stock levels accurately.

Reduced stockouts and errors

Stockouts can have a massive impact on your business. Stockouts lead to an increased risk of lost sales and negative reputation, ultimately hurting long-term customer relations. VMI leverages powerful software to quickly and efficiently replenish stock levels before they run out. VMI also leverages data integration and synching to enable automatic information updates across multiple platforms in real-time, thus reducing the risk of human error.

Boost staff productivity

Vendor-managed inventory takes away the hustles of managing active inventory, thus giving you and your employees time to focus on more critical tasks. Instead of dedicating precious resources to inventory management, you can use these resources to focus on sales. Your supply chain teams can use the power of software to optimize product mix and determine the best selling stock, thus increasing your profit margins.

How Vendor-Managed Inventory Improves Inventory Logistics

The inventory management practice of having retailers put their suppliers in charge of inventory replenishment has transformed the traditional way of doing business. Since VMI is based upon real-time supply chain collaboration, it allows suppliers to have access to customers' item-level POS data, so there is improved communication, planning, and customer service levels. Essentially, it's this real-time supply chain collaboration that leads to improved inventory logistics.

How Software Optimizes Vendor-Managed Inventory

Vendor-managed inventory solutions come with automatable features that ensure all your inventory data is centralized in a single location so that category managers, retailers, suppliers, and store personnel can easily access it. This data centralization boosts operational efficiency by ensuring crucial inventory data is available to each stakeholder from any location and at any time provided they have internet access. 

Also, centralized data gives retailers and suppliers greater visibility into crucial touchpoints and trends in production and consumption patterns. This data allows suppliers to determine the best strategies that can help underperforming stores to improve.

Conclusion

For most suppliers, the most significant cause of supply chain disruptions is poor stock management. A poorly managed stock room can eat into your profit margins, lead to customer dissatisfaction and loss of revenues. Vendor-managed inventory helps retailers increase operational efficiency through better managed, more cost-effective stockrooms. 

Curious to learn more about modern vendor-managed inventory systems? Check out our recent blog on its evolution and how inventory reporting is optimizing the process.

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