What is Vendor Managed Inventory (VMI)?

Vendor Managed Inventory (VMI) is a business model that gives the suppliers authority to effectively manage their customer’s inventory. When the customer’s inventory units drop to a certain level, the vendors/ suppliers replenish their customer’s inventory. It can occur either through a physical count of inventory or by having real-time access to customer’s inventory data.

The VMI concept was first developed in the 1980s and it became widely used by companies like Procter & Gamble and Walmart. The main objective of Vendor Managed Inventory (VMI) was to reduce operational cost and increase efficiency by streamlining business operations.

It’s true that vendors can easily manage inventory better than their customers. The main reason why vendors are in business is to fulfill inventory demands. Therefore, when vendors are given the responsibility to manage customer inventory, they make sure that incidences of obsolete inventory and stock-outs are reduced.

Vendors’ primary objective is to meet customer’s inventory goals so that their customers can take care of other core business operations and targets.

If there is no proper mechanism to manage customer’s inventory, the frequency of re-ordering products becomes unpredictable and this can result in urgent large orders which may overwhelm the vendors.

When a VMI is in place, vendors are able to monitor their customer’s inventory levels so as to achieve smaller and more consistent re-orders that help in maintaining acceptable inventory level targets.

Benefits of Vendor Managed Inventory (VMI) on Vendors

1) It gives vendors more control

When vendors use VMI, they have real-time access to their customer’s inventory and this enables them to easily forecast future demand. Knowing when to restock and the exact number of inventory units needed help vendors to carry out lean manufacturing which is manageable and reduces dead stock or stock shortages.

By giving vendors the authority to control customer’s inventory, it becomes easier to minimize inventory errors as well as the costs.

2) It improves vendor-customer relationships

When vendors guarantee and offer their customers high-quality inventory control services, they are able to develop a stronger relationship. Vendors who use Vendors Managed Inventory (VMI) model manage to grow a more strategic and long-term customer base. Sharing of inventory level data can also happen when there is a good vendor-customer relationship.

3) Reduction of Inventory costs

Inventory costs can be a thorn in any business if not well managed. With a Vendor Managed Inventory, vendors are given control powers and this enables them to minimize wastage, storage costs, urgent bulk orders request, and other associated expenses. When costs are minimized, profits are automatically optimized.

Benefits of Vendor Managed Inventory to Customers

a) It reduces obsolete stocks or shortage

Since replenishing of the customer’s inventory through VMI is done based on the real-time data collected, chances of overstock or stock shortage are minimized. Customers understand the right time new stock is needed and what quantity thus, reducing losses and unnecessary storage costs.

b) Less responsibility means increased efficiency

Vendor Managed Inventory (VMI) gives the vendor the primary responsibility of managing the customer’s inventory. When customers get relieved from such a tiresome burden, they are able to concentrate more on their core business. When there are less administrative work and divided attention, customers are able to increase efficiency and productivity by concentrating on their core business.

c) Increased sales and competitive advantage

When customers have products in stock always, they increase their client’s satisfaction levels. When a customer walks into your business premise and they find all the products that they need are in stock, they trust your brand and that’s how you build loyalty and increase sales.
Also, VMI helps traders to offer quality customer service to their target clients which helps in building a competitive advantage.

Author's Bio: 

Author, Freelance writer