Vendor managed inventory (VMI) is a streamlined approach to inventory management. The goal of VMI is to align business objectives and supply chain operations for both the vendor and their customers.

VMI (Vendor Managed Inventory)

VMI is an inventory management technique in which both the supplier and buyer of goods receive a benefit from the efficient flow of inventory. VMI allows the supplier to manage the product or materials for their customers. When a supplier and buyer partner together to increase the efficiency in the handling of their inventory, less waste is created during the transfer of goods. When the buyer shares their point-of-sale (POS) data with the seller, the seller immediately knows when to ship additional goods to the buyer.

The use of VMI is known to increase sales because the product is always available for the consumer. Mangers should make sure their advertising department works hand in hand with their VMI team to minimize the risk of unsold inventory from occurring. In order for VMI to be utilized correctly, the sales, manufacturing, and distribution teams of an organization need to work together. The different areas of an organization working together to efficiently move the product from supplier to buyer is known as managing the supply chain.

The other benefit to a VMI system is that it forces downstream integration via the entire supply chain. This moves the responsibility and risk of the inventory from the buyer onto the seller. Essentially, those responsibilities have been outsourced to the vendors/sellers.

Why Use VMI?

VMI can be used to meet consumer demand; the supplier is now responsible for restocking the product. The use of a VMI system leads to the following:

  • Elimination of any kind of safety stock.
  • Decreased inventory levels.
  • Decrease in purchasing administrative costs.
  • Reduced warehouse costs.
  • Decreased turnover in suppliers.
  • Increased cash flow.

Does VMI Have Any Disadvantages?

The following are the main disadvantages for a buyer using a VMI system:

  • It Allows non-employees to access your data.
  • It is dependent on a third party to determine inventory levels.
  • It has a lack of total control over the inventory process.
  • It can be challenging to find a vendor that can be trusted.

The buyer may eventually become totally reliant on the supplier, and this may lead to the seller taking advantage of the buyer by doing the following:

  • Charging higher prices.
  • Reducing the quality of the product.
  • Making changes to the supply chain that the seller does not agree with.

The incentive for the supplier to join the buyer's VMI system is that they will most likely be locking into a long-term relationship that encourages the growth of both businesses.

How Does VMI Work?

  • It clarifies expectations.
    • Although a seller will incur substantial upfront costs to implement a VMI system, they will benefit in the long-run from building a trustworthy relationship with their buyers. It's important that both parties actively communicate throughout the entire VMI setup process to eliminate miscommunications or disputes.
  • It determines the best way of sharing data.
    • The odds of a successful business transformation increase substantially when both parties agree to share vital information in a timely and effective manner. Proprietary data does not need to be shared between the two parties, but enough data to get the flow of product moving is necessary. To add visibility into the process, the buyer should share their production forecasts and schedules to the supplier.
  • It preserves open communication channels.
    • Make sure both parties are openly communicating their goals to each other

The VMI system process begins with the buyer sending a Product Activity Report to the supplier. The Product Activity Report provides data regarding the following:

  • Transfers and sales.
  • Current inventory levels.
    • On-hand.
    • On-order.
    • In-transit.

The system will then analyze the provided data and will create replenishment orders. The new orders will be based on the following:

  • Transactional review.
  • Periodic or weekly review.
  • Promotions Seasonality.

The supplier's inventory management team will review the orders made by the system before final approval is completed. Once approved, the VMI system will send purchase orders to the supplier and buyer. In customary fashion, the VMI system will notify both parties of all transactions in order to provide transparency in the process. The system will be able to provide both parties transaction information on demand. For example, if problems or exceptions occur within the system, both parties will be immediately notified.

If you need help with vendor managed inventory, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.