What is VMI (Vendor Managed Inventory)?

VMI is short for vendor managed inventory. The name pretty much tells you the most important part of the story: it’s a way for the vendors or suppliers to manage the inventory. This is done to meet the needs for Just-In-Time (JIT) production.

The VMI strategy aims at reaching the lowest costs possible for both the vendor and the manufacturer. It’s a regulation stipulates that the vendor is responsible for the inventory management. Meanwhile, the terms and deals are under constant reviews and modifications so as to reach a sustaining and developing collaboration strategy for the inventory management.

How does VMI work?

Now you know what VMI is, let’s take a look at how it works in real life:

  • The vendor ships the materials to a designated location appointed by the manufacturer which is just 1 or 2 hours’ drive away from the assembly spot.
  • A third-party logistics company will help with the management of the materials, which still belong to the vendor.
  • The vendor and the manufacturer will align with each other on the inventory stock details and the on-going replenish strategy, so the manufacturer can finish the payment once they use the materials.

The following image might help you with the understanding:

Benefits of VMI

The above content may show you some benefits of the vendor managed inventory strategy, but not all. Now let’s break it down to you so you can see for yourself how much the VMI approach can help in the entire supply chain:

For vendors or suppliers:

  • Streamlines the delivery anticipation to a large extend with the point of sales data sharing;
  • Makes it easier for product promotion by taking the current inventory situation into consideration;
  • Reduces the product return rate from distributors by reducing the anticipation and sales margin;
  • Eliminates the product shortage situation by sharing the information among the supply chain network and increasing the delivery efficiency;
  • Updates the manufacturing plan with better and more effective anticipation.

For distributors and re-distributors

  • Increase the shipment speed by automating and reducing tasks that used to be handled by people;
  • Decrease inventory cost and thus save more money;
  • Reduce product shortage problem and thus increase customer satisfaction;
  • Reduce the operation cost by shifting the planning and demanding workload to vendors;
  • Increase the overall logistic performance by replenishing products in time;
  • Response faster to customers’ needs.

Shared benefits

  • Reduce possible data error with the shared information in the system;
  • Speed up the overall supply chain efficiency;
  • Establish a sustainable and trust-worthy supply chain partnership;
  • In the long run, more effective operation strategies, more new product development opportunities and more sales will also add to the existing benefits.

Risks of VMI

All the benefits make VMI seems too good to be true. Of course, without being properly used, the vendor managed inventory approach will throw your company and your supply chain partner in huge risks as well.

Here are some of the areas that you should pay attention to:

Choosing the right partner

To a large extend, the supply chain partner you choose for your project determine the outcome of your VMI system.

When implementing the vendor managed inventory approach, you’re actually hand over the material management functions to your supplier. But if the supplier fail to finish the job because of their poor management skills, unstable financial status or staff incompetency, you’re at risk of having no material supply.

Problems like these could throw a wrench at the entire VIM system. So we could never stress enough the importance of selecting a right supply chain partner.

Having only one supplier

You tend to rely more on your suppliers in the vendor managed system. Because VMI will usually integrate the supplier resources and only select one or few suppliers from the pool. With more collaboration, comes stronger reliance.

That said, when VMI supplier behave poorly, it takes some time for you to turn to the backup supplier for help since they need to be trained to join in your VMI system, especially when you have only one supplier (being the exclusive supplier could be the negotiate deal for some suppliers).

Therefore, it’s always wise of you to stay away from an exclusive supplier when you can choose not to.

Costs and spending

There is no free lunch. This rule always work.

With more responsibilities and risks bore by the VMI supplier, it’s natural and reasonable that they want more in return. Higher product selling price is one of the approach that you may see. But you should do good math on your business and your supplier to see if you’re willing or capable of taking the concealing risks behind your relationship.

Confidential business information

The VMI system requires that you and your supplier work closely together, to a point where your production plans and sales plans are visible to your supplier. But your supplier is not exclusively work with you: they could form relationships with your competitors as well.

That said, the NDA and other contracts between the two of you need to have the reparation and waiver terms clearly defined.

Contracts should work well in most cases. But it’s vital that you and your supplier trust each other. Only with mutual trust built on the both sides, the communication channel can be open and transparent and the VMI can be made the most out of.

It’s also important that you don’t assume staff working for your partner have the same understanding about what’s confidential information and what’s not as you. Therefore, it’s crucial that you provide training and knowledge sharing opportunities to them, as a way to reduce such possibility.

 

That’s about what we have to say about VMI. Feel free to let us know what we can do to help with your VMI process. With years of experience in the field, the Insight Solutions team will definitely not let you down. Start now and make the most of the VMI.

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