Vendor-Managed Inventory

Vendor-Managed Inventory (VMI) is a means of optimizing supply chain performance in which the supplier (manufacturer/distributor) is responsible for maintaining the customer's inventory levels. The distributor has access to its customer's inventory data and is responsible for generating purchase orders.

Under the typical business mode, without VMI, when a customer needs product, he or she places an order with a supplier or distributor. The distributor is in total control of the timing and size of the order. The distributor maintains the inventory plan.

Vendor-Managed Inventory is a planning and management system that does not tie directly to inventory ownership. However, many of the information sharing requirements are the same as in consignment arrangements save that, in a VMI approach, ownership transfers to the stocking location. Under VMI, instead of the customer monitoring its sales and inventory for the purpose of triggering replenishment orders, the distributor assumes responsibility for these activities. Benefits include:

1. Improved customer service

   By receiving timely information directly from point-of-sale data, suppliers and distributors can better respond to customers' inventory needs in terms of both quantity and location.

2. Reduced demand uncertainty

   By constantly monitoring customers' inventory and demand stream, the number of large, unexpected customer orders will dwindle or disappear altogether.

3. Reduced inventory requirements

   By knowing exactly how much inventory the customer is carrying, a distributor's own inventory requirements are reduced because the need for excess stock to buffer against uncertainty is lessened or eliminated.

4. Reduced costs

   To mitigate the up-front costs that VMI demands, many suggest that manufacturers reduce costs by re-engineering and merging their order fulfillment and distribution center replenishment activities.

5. Improved customer retention

   Once a VMI system is developed and installed, it becomes extremely difficult and costly for a customer to change suppliers.

6. Reduced reliance on forecasting

   With customers for whom a supplier runs VMI programs, the need to forecast their demand is eliminated, thus sidestepping forecasting problems that, by definition, always contain errors.

The coupling of VMI often occurs with consignment, which is “the process of a supplier placing goods at a customer location without receiving payment until after the goods are used or sold.” When coupling VMI with consignment, the supplier must make sure that the consigned inventory moves rapidly through the customer's points of sale.

Among industry practitioners, there is generally no specific distinction made between who owns the inventory (the buyer or the seller) in application of the phrase “vendor-managed inventory.” Some distributors will manage inventory they still own until their customer sells it, and some will not.

In the VMI model, the distributor receives electronic data — usually Electronic Data Interchange (EDI) or via the Internet — that provides him with the customer's sales and stock levels. The distributor can view every item that the customer carries as well as true point-of-sale data. The distributor is responsible for creating and maintaining the inventory plan. Under VMI, the distributor, not the customer, generates the “order.”

VMI does not by necessity change the “ownership” of inventory. It can remain as it did before. VMI reduces stock-outs and reduces inventory in the supply chain. In summary, some VMI features include:

• Shortening the supply chain.

• Centralized forecasting.

• Frequent communication of inventory, stock-outs and planned promotions. EDI linkages facilitate this communication.

• No or less frequent manufacturer, distributor or supplier promotions.

• Filling trucks in a prioritized order. For example, items that are expected to stock out have top priority, then items that are furthest below targeted stock levels, then advance shipments of promotional items (promotions allowed only in transition phase), and finally, items that are least above targeted stock levels.

• Improved supplier relationship with downstream distribution channels.

• Result: Inventory reduction and stock-out reduction.