What is Vendor Managed Inventory? Benefits, Limitations, Examples and More

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The traditional method of supplying a customer is, of course, to wait for an order or request. The customer places a purchase order for the goods or products they need, and the supplier responds. It’s their job to process the purchase order, take payment, and prepare it for delivery. While there are no major flaws in this system, there are times when it could be carried out much faster.

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This is what vendor managed inventory software (VMI) is designed to achieve. It caters, specifically, to long-term commercial relationships. So, for example, if you own a paper factory, many of your customers (perhaps all of them) are likely to need recurrent deliveries, rather than a one-time order. Vendor managed inventory allow suppliers to schedule ongoing deliveries.

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Getting to Grips with VMI Systems

In simple terms, vendor managed inventory works by giving suppliers the authority to make stock decisions on behalf of their customers. You might find one example in a restaurant. The kitchen staff stands to save a lot of time if they let the supplier work out when they need fresh vegetables, flour, cooking oils, or bread. That way, they’re always stocked up.

It works exactly the same way in a hair salon. The staff let suppliers decide when certain products are running low and need replenishing, with the understanding that these items should always be topped up to a certain level. Not only does it eliminate tedious daily or weekly tasks for the customer, it means there’s never any risk of running out of key commodities.

The Benefits for Vendors and Suppliers

So, the advantages for the customer are clear. Yet, how does the supplier benefit from vendor managed inventory systems and solutions? Well, this is where opinions can differ among industry experts, and even suppliers themselves. The truth is that businesses stand to benefit, but primarily as a result of improvements for the customer.

After all, as a vendor, the productivity of your supply chain depends on the actions of your customers. If they don’t handle their transactions in an efficient, logical way, it’s going to make it harder for you to cater to them. Just imagine the kind of customer who constantly forgets to place orders on time and, therefore, needs to call in favors to get essential products.

Better Forecasting

Not only does this kind of behavior make it tricky to get orders out on time, but it also makes forecasting nearly impossible. You can’t keep track if there isn’t any logic to the way transactions are placed. With vendor managed inventory, it doesn’t have to happen, because you can take control and monitor stock levels on behalf of the customer.

Fewer Returns

Often, flexible returns policies encourage customers to be indiscreet with their transactions. If they know they can return surplus stock, they may order carelessly. It can be a big problem for vendors, particularly when customers sit on stock for long periods of time, only to send it back after market interest has waned. VMI systems ensure that supplies never get too high or too low.

Securing a Monopoly

It’s worth remembering that taking control of inventory grants you a bit of a monopoly when it comes to your customers. Switching to a rival company involves a lot more work when customers have already set up a collaborative system. Therefore, they’re much less likely to dump you for the competition if you handle almost every aspect of their stock replenishment.

Reduced Waste

Finally, all of these advantages lead to less waste, reduce lost sales due to stockouts, greater control over safety stock, and less damage from customer errors. By using vendor managed inventory systems and software to help customers improve, you also lower the chance of being caught up in any costly mistakes they might make.

Data Calculations and Forecasting

If you want to benefit from vendor managed inventory, you need the right software. With robust VMI solutions, you can track and forecast demand, based on information provided by the customer. It can take some time to set up a new account, but you’ll save a lot of money once you begin to automate your transactions.

The VMI process begins when the customer sends an initial Product Activity Report. It contains demand data such as total sales and transfers, as well as “on hand,” “on order” and “in transit” stock counts. Usually, reports are sent periodically so that the supplier can make adjustments to accommodate any major changes in demand.

The vendor managed inventory software is able to analyze the data and create recommended replenishment orders. These decisions are made in conjunction with special algorithms. They take into account any conditions that you or the customer deem to be influential or important, such as frequency or dollar velocity of sale, and events like seasonal promotions.

Setting Up a New VMI Schedule

In order to establish a new VMI schedule, the vendor and the customer need to agree on several conditions. Normally, these are the frequency of replenishment, the required in stock percentages, and the cost of transactions. Sometimes, these conditions need to be altered in order to maintain stock levels, but your VMI software sends alerts to the customer if this happens.

When selecting VMI software, it’s important to pick a system that prioritizes transparency. Most customers are only happy to let vendors take control if they can keep a close eye on the decisions being made. For this reason, the software you choose should be capable of providing the exact same information for both your staff and the customer.

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  • Derek Dewitt - November 2, 2017 reply

    I can see why a convenient store or business would want to have a managed inventory system when it comes to restocking supplies. I like that you mention how this makes it easier to manage stock and predict what you will need to order next. Customers get really upset when you don’t carry what you need, so having a system to track this sounds important.

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