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Vendor-managed inventory: Benefits, Challenges Seen In VMI Supply Chain Management

Posted Tuesday, September 6, 2022 in Solutions

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 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 models in this piece, many of the presented ideas apply to multi-vendor and multi-supplier VMIs.

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.

Stocking is automatically organized on the supply side, 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, and sizes, if applicable), are — poof! — no more. No one needs to initiate the purchase order; some VMI partnerships forgo purchase orders altogether.

Less inventory on hand

Having accurate data means suppliers aren’t producing a significant overage. Fewer items to store mean less warehouse space is needed at retail and manufacturing locations, resulting in 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, making the operation much more efficient. Also, having a firm grasp of the customer’s habits helps introduce new products, colors, styles, and more.

Build a lasting buyer-supplier relationship

Vendors and retailers work together to achieve the same goal; 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 will make the right decisions. Suppliers are delighted to have the responsibility — it feels good to know your partner trusts you. These good vibes translate into a lasting, profitable, and happy relationship.

More opportunities

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 has some challenges and risks.

Unpredictable markets

Unpredictable markets can be detrimental. When a market changes, you may end up with a large amount of something you cannot 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 assess available space and the needs of the stores to decide if they have the capacity. Suppliers without sufficient storage may not be the best candidates for VMI.

Sharing sensitive data

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.”

Additionally, you must determine ownership of physical inventory counts before entering a VMI agreement. At what point does the retailer take ownership of the product?

Special promotions

The flow can be damaged by special promotions that aren’t communicated to suppliers. Target often runs incentives like “Spend $30 in the beauty department and receive a $10 gift card.” This may bring a spike in sales; if the supplier isn’t ready for it, stockouts abound.

Phase-out plans

Phase-out plans need human involvement. If an item is on the way out, you should revert to regular ‘ole inventory management. Problems will arise when orders are triggered after the retailer has decided not to carry the product anymore.

Is VMI right for you?

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 suitable for your product, ask questions. Is the demand reasonably predictable?

CONTACT US

BOLD VAN has helped many clients enter into successful VMI relationships. We offer a variety of EDI solutions: From cloud-based to full EDI system implementation, we have you covered. Contact us to learn more: call 844-265-3777 or email info@boldvan.com.

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