By Molly Goad
Vendor managed inventory, aka VMI, is a b2b relationship where the vendor (supplier of goods) is in charge of the replenishment of items for the retailer (buyer). With this structure, both parties have access to inventory numbers at all times, yet instead of the retailer making the buying decisions, the vendor takes the lead.
Traditionally, a retailer manages inventory and places orders, but VMI puts the burden on the vendor to make sure the right items get onto the shelves before the shelves go bare, saving time and resources.
I love history (see EDI’s Connection to the 1948 Berlin Airlift), so in researching this article I set out to learn when this ordering relationship began.
According to many sources on the Web, it all started with diapers in the late 80s.
At that time, Walmart was handling its inventory of Pampers diapers. The retailer placed orders to replenish its shelves as it deemed necessary, but didn’t always get it right, and sought a better way. So, Walmart collaborated with Procter & Gamble, the manufacturer of the popular diaper brand, and VMI was born. (Back then, it was called “continuous replenishment management.”)
The results were extremely favorable. Once the replenishment duty was handed off, Walmart enjoyed significant cost savings (because managing inventory is pricey!) and stock-outs became a rare occurrence. Walmart distribution centers had the “just right” amount of diapers, and faced fewer costly overstocks (thereby freeing up space for other products). No more, no less.
P&G reaped the benefits as well. The manufacturer gained a clearer picture of consumer demand that helped manage the supply chain more efficiently. Ordering time was reduced and Walmart’s shelves were replenished quicker. Now, when it became time to reorder, P&G was ready with the diapers, because P&G was in charge. No surprises.
This new partnership put P&G in Walmart’s good graces, which translated into preferred positioning inside the stores, like coveted endcap displays.
Today, it’s not just the large retailers and manufacturers who use VMI, and there are many reasons to consider this type of relationship if it’s available to you.
Entering a VMI relationship has many benefits (and we’ll go over those in detail in my next post), but today let’s discuss inventory balance.
When there’s too much inventory on hand, valuable warehouse space is being used which is costly to businesses. On the other hand, a supply shortage means the shelf is empty, customers can’t get the needed product, and sales are lost. In addition to the lost revenue, customers may find a similar product, and potentially be lost forever. This is also costly to your business.
Balance is crucial.
In a VMI system, the product is stocked quicker than in a traditional supplier-buyer set up — it’s not triggered by an individual’s decision on the buying side. The retailer will not run out of stock because the relationship is such that replenishing items occurs automatically, once inventory hits a predetermined level. As stock-outs decrease, sales increase.
Data is always current with the use of electronic data interchange (EDI). The supplier is notified by the system and can place the order without having to wait for the retailer to hit the “go” button.
Balance is achieved.
Is it perfect all the time? No, of course not. (I’ll dive into the cons of VMI in my next post, along with pros.) But it’s quite an improvement over waiting for the customer to get back to you with the orders.
VMI is not for all product
It’s important to note that VMI isn’t the solution for all items. Items that have predictable consumption (like diapers!) are great VMI candidates, as well as high-demand, low-value products.
But products in fast-changing markets, including electronics and fashion, could be risky to put into a VMI solution.
Want to learn more?
BOLD VAN can help you streamline your retail supply chain. We offer a variety of EDI solutions: From cloud-based to full EDI system implementation, we have you covered. We are pros at setting up VMI relationships as well. Contact us to learn more: call 844-265-3777 or email firstname.lastname@example.org.