Vendor Managed Inventory
Vendor Managed Inventory (VMI) is a business relationship where a manufacturer or distribution business takes over the management of inventory for a retail or wholesaler. Using Electronic Data Interchange (EDI) or other electronic methods for communication, the vendor of the product will manage orders and fulfillment for those further down the distribution chain.
VMI: Managed vs Consignment
There is a significant difference between managed and consignment sale types of VMI, and some similarities/differences merit further discussion before we look at the benefits of VMI management. Consignment is where the vendor retains ownership of the product until the time when it is sold to the end-user. When the inventory is sold, the retailer takes a commission of the price and sends the rest of the money back to the vendor, as payment.
VMI can be used with consignment products but does not have to be. VMI can as be used as “Managed”. In this case, the goods are sold to the retailer at the time of shipment, but the vendor manages the inventory levels at the customer’s sales location. The Vendor does not wait to receive a purchase order to restock; the vendor handles replenishing the inventory to maintain optimal sales. In some VMI relationships, it means the vendor creates and maintains the displays at the sales location and stocks them to make certain they are full.
VMI is dependent upon having the right software and the right relationships with customers. Since communication between customers and vendors is essential to a successful VMI system, the right software will need to facilitate communication via the cloud to increase access and communication.
Increased Customer Service
Perhaps the most important aspect of VMI is the improvement of channel communication. Manufacturers, distributors, and retailers/wholesalers have to build communication systems utilizing advanced software. This provides both you as the vendor and your customers with the information necessary to operate a VMI system. Additional results from increased communication and cooperation are better customer service, improved quality, reduction of costs, and increased sales. You improve your customer service by accurately and swiftly responding to your customers’ needs.
To establish a proper VMI relationship, you must have access to a significant amount of data from your customers, including POS and inventory adjustments. This data provides you with the information necessary to create an optimal inventory management plan. Additional uses for this information include order management, income planning, parts, supply planning, human resources, and more.
Rather than guessing how much product a customer will need based on intuition or limited information, VMI gives both parties the right information needed to optimize the supply chain.
Strategic Business Alliances
VMI benefits business relationships between more than just you and your customers. Distributors often take part in a VMI relationship, increasing the accuracy and efficiency of your inventory management while decreasing the costs. Often a distributor will receive the same sales data the vendor does and then optimize the inventory at the customer site to reduce costs to the vendor and to decrease turn-around time when the customer needs new inventory.
Additionally, the same system of communication built with your customers can be used to build relationships with your suppliers to increase your use of JIT inventory in your manufacturing processes. While any business relationship needs to be entered into with caution, the systems that businesses need for VMI facilitate much stronger business alliances across the entire supply and distribution chain.
JIT stands for Just-In-Time. JIT Inventory focuses on having enough inventory on hand to meet current needs. The amount of inventory needed depends on your product type, how fast it will move off the shelves to consumers and how long it will take to produce more. Due to the complicated management systems required, JIT inventory management has only recently become an affordable option for businesses because of the advances in the cloud, IT speed and storage, and business systems.
Your customers want to utilize JIT inventory to get the most out of their physical space and reduce costs to their business. With VMI, you establish JIT inventory levels for your customers and produce according to that need. You see their sales and inventory levels which provides a better insight into their needs. This has tremendous advantages for manufacturers and warehouses as well as for their customers. Leading to better forecasting for the vendor, inventory levels can be optimized for both parties.
Variation from Franchising
For many businesses, the advantage of franchising is maintaining control of parts and inventory down the distribution chain. Napa Auto Parts has consistent pricing, inventory, and displays for all their manufactured goods, no matter the location. This is just one of the major advantages of franchising. With the increased communication with your customers through VMI, you have the opportunity to build quality control into your relationships with your customers. This means that you can have a hand in marketing your inventory to the end-users of your product, not just the other businesses in your distribution chain.
Accurate forecasting requires data. The more data you have about sale results, the more information you can infer about customers, seasonal trends, the demand curve, your product’s life cycle, and historical data. For example, a spike in car parts from May through September 2020 could be caused by summer travels. With the data gained by using a vendor-managed inventory system, you can improve accurate forecasts for likely increases and drops in demand. This aids long-term strategic planning and short-term order fulfillment.
Reduction of Sales Costs
Storage adds significantly to the costs of your product. You incur costs to store inventory waiting for an order, your customer also incurs costs storing inventory waiting for a sale, you have collectively added significant costs to each item sold. Whether this cost is visible or not, it is there.
These 7 benefits show that with the right IT and communication, Vendor Managed Inventory is an excellent way to increase your customer service offerings, whether you are a manufacturer or a distribution company. Integrate VMI to build relationships, improve quality of product delivery, increase income, and decrease costs.
We offer complete warehouse management solutions that integrate well with any VMI system you may put in place. Contact us today to see if our WMS will work for your business’s needs or for more information about business systems to improve your bottom line.