VMI (Vendor Managed Inventory): How To Use It Right?

First, allow us to explain what vendor-managed inventory is with the vending machine for soft drinks:

  • The company needs such a vending machine, and it’s willing to provide room and required accessories such as a power outlet for it;
  • The drink vendor will monitor the daily operation of the vending machine, and will replenish when needed;
  • A third-party delivery company will be responsible for shipping the drinks to the company.

In this way, there will be less problems such as drinks not being replenished in time. The cost of inventory and delivery will be reduced as well. And a strong partnership may be formed between the vendor and the company.

Feel free to read What is VMI (Vendor-managed Inventory) if you’re interested in know more about it.

However perfect the VMI process looks on the book, there could be some bumps on the road to actually get it executed.

Here are some of the most commonly seen problems that could happen during the VMI process, and how your company can deal with them.

Common problems in vendor-managed inventory

The VMI approach was first designed to reduce the bullwhip effect, and increase the on-time delivery rate. As the process develops, a new advantage revealed itself: shift the inventory responsibility to the vendor or supplier and thus reduce the inventory cost for distributors.

Normally, the VMI consignment agreement should stipulate that the vendor own the stock. But some companies totally ignore all the other terms and regulations and want nothing but to reduce the inventory cost when they are executing VMI. This mindset blinds them from seeing the bigger picture and thus the following problems could happen:

Select unqualified suppliers or vendors

Let’s get it straight: the vendor managed inventory process is not for suppliers or vendors of all levels.

Your supplier or vendor needs to have at least good internal management skills, a stable financial status, and can steadily produce product of high quality.

Otherwise, you won’t have enough time to response to sudden changes in the project if your supplier or vendor fail to deliver the goods in time or meet your quality requirements. And you’re left to swallow down the bitterness of blind trust.

If you’re not sure how to decide which supplier to work with, feel free to talk to us. We’re a team of experts and professionals that are well-experienced and skilled in selecting and evaluating suppliers to help your business grow.

Unprofessional third-party logistics or delivery company

The third-party delivery company plays a key role in the success of the vendor-managed inventory process. Warehouses in the VMI are not simply used to store goods. Instead, they should be highly professional warehouses that are highly digitized and can add value to the logistics.

Unprofessional warehouses usually fail to deliver product on time or provide accurate inventory data for sales and shipment prediction. These will to a large extend affect the replenish plan. To make matters worse, such behaviors could jeopardize your production plan and on-time delivery on-time delivery.

Let suppliers take charge of almost everything

Inventory management should still be part of your business’ daily routine even though you have adopted the VMI approach.

But there are so many companies leaving their suppliers decide everything, from sales prediction to replenish plan.

This is not an ideal way to build a healthy VMI process. Especially when your supplier might decide to ship the product once in quite a long time just to save some logistic costs.

Worse even, your business risks shortage of materials without proper management over the inventory. And it’s unfair that your supplier takes all the blame.

It is, of course, true that implementing VMI helps to reduce the inventory pressure. But if you find your business in the above 3 situations, it’s very likely that your VMI approach is not saving you money. Instead, it could cost you more than you could imagine.

VMI best practices

With what said above, we believe it’s equally important that you know how to make the most out of the VMI process. And here they are:

Select the right supplier

Set up your own standards and criteria when selecting suppliers.

Set a number for the purchase amount could be a good stater. For example, if a supplier is making less than 10 thousand dollars a year in purchasing, and the net profit is 8%. It’s unlikely that they will work with you in the VMI process to earn just the 800 bucks from you.

Your prime choice go to the suppliers that you have already formed a stronglong-term partnership with. Trust from both sides lay the foundation for the VMI process.

Select a professional logistics service provider

A qualified and professional VMI warehouse should be equipped with highly digitized warehouse management system, providing accurate storage and inventory information to you and your suppliers.

Moreover, it should provide some other value added services, such as receiving inspection, packaging replacement, and recycle empty packages etc.

Set out a reasonable min-max inventory planning

How to set the appropriate range for the min-max inventory planning? Here is the how you can do it:

Minimum inventory

This number is set to make sure that the production won’t stop out of the blue and that the inventory is enough for the next replenish.

Minimum inventory = Daily average needs x Safety time (day)

The safety time is up to the supplier: the more stable and steady the quality of the delivered goods, the shorter the delivery time, the shorter the safety time. And vice versa.

You should also include the following elements in the safety time:

  • Delivery time: From supplier’s factory to the VMI warehouse;
  • VMI warehouse operation time: Includes time for goods loading, un-loading and storing;
  • Buffer time: Save some time for buffer, just in case of accidents.

Maximum inventory

When setting the number for the maximum inventory, you need to take into consideration the storage capability of the warehouse, and the increasing carrying costs** for the increasing storage quantity.

Carrying costs could include the following items:

  • Warehouse: Rent, depreciation, operational costs, and insurance;
  • Labor: Salaries, bonus, and other benefits;
  • Loss: Missing products, scrapped and outdated goods.

The VMI approach plays a much more important role in mitigating the bullwhip effect than just a tool to shift your inventory pressure to the warehouse.

If you want to make the most out of the vendor-managed inventory process, build a long-term relationship with your suppliers that is based on mutual trust first. Then share your sales predictions with your supplier, set up a reasonable replenish process, train your staff and that of your supplier’s. This is how you can manage the process effectively and efficiently.

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