Latest benefits and challenges seen in VMI supply chain management

Interior of warehouse with racks full of boxes and goods

By Molly Goad

Has a vendor-managed inventory relationship presented itself within your supply chain? Are you curious about the benefits (there are many!) and potential challenges of a VMI buyer-supplier partnership? If so, you are at the right place.

If I have to sum it up in one sentence, I’d say VMI involves a high level of trust and communication between buyers and suppliers, and if you have that, the rest is gravy.

There is, of course, more to the story, so I’m here to lay out the pros and potential pitfalls of vendor-managed inventory.

(What exactly is VMI? Keeping Product Quantities In Balance With A Vendor-Managed Inventory Solution answers that question and offers the history behind it.) 

I should mention that various types of VMI relationships exist — it’s not a one-size-fits-all model. While I’m primarily speaking of the single-vendor and single-retailer model in this piece, many of the ideas presented apply to multi-vendor and/or multi-supplier VMIs as well. 

Benefits of Vendor Managed Inventory

Increase sales. This is what all parties want, right? VMI is a data-driven ordering system, so the inventory is ordered when the time is right. Stock-outs are few and far between, translating to more sales. 

Automate supply chain procedures. Keeping track of inventory levels, ordering and reordering products, and initiating purchase orders and the subsequent responses takes time, my friend. When VMI automates this task, suppliers and retailers alike can remove responsibilities from employees, shifting their attention to other areas of the business that need it.

On the supply side, stocking is automatically organized, so fewer people are needed to get the items on the shelves. 

And on the retail end, the ordering decisions, including when and how many (and what colors, styles, sizes, if applicable), are — poof! — no more. No one needs to initiate the purchase order; in fact, some VMI partnerships forgo purchase orders altogether.

Less inventory on hand. Having accurate data means suppliers aren’t producing a large overage. Fewer items to store means less warehouse space is needed at both retail and manufacturing locations, resulting in a cost savings.

Understand the customer. Suppliers gain valuable data and insight into customer demand, an area they don’t necessarily have access to in a traditional inventory relationship. Thus, suppliers can plan manufacturing schedules based on the data, once again making the whole operation much more efficient. Also, having a firm grasp on the customer’s habits is helpful in introducing new products, colors, styles, and more.

Build a lasting buyer-supplier relationship. Vendors and retailers work together to achieve the same goal, and therefore a deep level of trust and value is established in a VMI partnership. When a retailer hands over the ordering job to the supplier, they trust the supplier is going to make the right decisions. Suppliers are delighted to have the responsibility — it feels good to know your partner puts their faith in you, doesn’t it? All of these good vibes translate into a lasting, profitable and happy relationship. 

Opens the door for more opportunities. Suppliers, here’s another item to consider: Once a successful VMI partnership is established with, say Walmart, the retailer may be more inclined to shelve other products from your line.

Challenges for vendor-managed inventory

No system is perfect, and VMI indeed has some challenges and risks to consider. 

Unpredictable markets can be detrimental. When a market changes, you may end up with a large amount of something that you’re unable to move. 

Suppliers need adequate warehouse space. Yes, I said in the pro section “less inventory on hand,” but I didn’t say no inventory will be sitting around. The burden is on the supplier to order and house the items until the time is right at the retail level. Suppliers must carefully assess available space and the needs of the stores to decide if they have the capacity; those without sufficient storage may not be the best candidates for VMI. 

Data sharing. Sensitive data must be shared between parties when implementing VMI, and not everyone is comfortable with this scenario. Make sure the partner is someone you trust (more on that in the next paragraph). Listen to your gut — if you’re unsure, or something doesn’t feel right, then perhaps VMI isn’t a good choice. 

Finding quality VMI partners. Developing valued partnerships, as discussed in the “pros” section, also has a contrarian slot in the challenge section. You need to enter into this relationship with partners you trust. Get to know the people you’re working with before diving into VMI. It would be a shame to have a bunch of inventory on hand just as the retailer says “ah, just kidding, we don’t want that anymore.” 

Which brings us to the next item to consider: ownership of physical inventory counts must be clearly defined before entering a VMI agreement. At what point does the retailer take ownership of the product? 

Special promotions that aren’t communicated to suppliers can hurt this flow. Target often runs incentives like “Spend $30 in the beauty department and receive a $10 gift card.” A deal of this nature can bring a spike in sales, and if the supplier isn’t ready for it, stockouts abound.

Phase out plans need human involvement. If an item is on the way out, be sure to revert back to regular ‘ole inventory management to avoid headaches that arise when orders are triggered after the retailer has decided not to carry the product anymore. 

VMI is not for all products. Low-value items with predictable sales numbers are great candidates for VMI. Jewelry and other high-priced products are not. When evaluating if VMI is right for your product, ask questions. Is the demand fairly predictable?

Contact Us

BOLD VAN has helped many clients enter into successful VMI relationships. Contact us to learn more: call 844-265-3777 or email info@boldvan.com.

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