What Is a Vendor Managed Inventory Contract?
A vendor managed inventory contract is an easy way to ensure that inventory arrives on time to the factory floor.3 min read
A vendor managed inventory contract is an easy way to ensure that inventory arrives on time to the factory floor. A vendor managed inventory is a process where the manufacturer takes care of the inventory for the retailer or distributor.
Vendor Managed Inventory Basics
With the common business model, the retailer or distributor orders a product from the manufacturer. This gives the distributor control of the size and delivery of the order. The vendor managed inventory system links the distributor and retailer through an internet connection or EDI.
The manufacturer knows the stock and sales numbers of the retailer or distributor since the companies' Enterprise Resource Planning systems are linked. The orders are created and inventories are managed by the manufacturer at agreed levels. Retailers like Walmart use the vendor managed inventory with great success.
The vendor managed inventory model has been able to give companies an effective turnover rate and profit level. The model was first tested by Walmart and Procter & Gamble in the 1980s. Their vendor managed inventory strategy has allowed Walmart to be the largest retailer worldwide.
Vendor Managed Inventory Disadvantages
- Company groups like sales and purchasing may be reluctant to lose control over a major business step.
- Management may also be skeptical of success.
- The quality of the controlling computing systems is what can determine the success of the contract.
- With less inventory, the manufacturer can have reduced shelf space and a decrease in market share.
- The manufacturer also has to worry about promotions and incentives.
Is Vendor Managed Inventory a Good Option for Your Business?
There are some questions to ask to determine if VMI is for you, including:
- Are your sales percentages large enough for the supplier to assume more risk?
- How are your sales determined? Steady, seasonal, or made-to-order?
- Does your supplier adapt to changes?
- Does the supplier have the infrastructure and resources to manage inventory effectively?
The vendor managed inventory is not only for large companies. For those who have long lead times, a VMI can help alleviate this. The supplier can create containers to decrease stock and increase purchases, in turn looking over the SKU in various categories, which will allow for great savings. Your vendor can help with managing the costs of the variables in inventory.
Benefits of Vendor Managed Inventory
- Fewer spreadsheets
- Less confusion or misunderstanding
- Ability to check on current information and reports to check inventory and orders
- More reliable
There are also benefits for both the supplier and client, including:
- Data entry mistakes are minimized given the use of computer communication and processing.
- Both parties want to give good customer service to the end client. Having the item in stock when a customer asks for it benefits everyone involved.
- The supplier and customer form a strong partnership by working closely together over time.
- Purchase orders are now predefined and made beforehand.
The goal of the system is to have fill rates improve from the supplier to the end customer. Since the supplier is now responsible, planning and ordering costs will decrease, and there will be a decrease in inventory and stock-outs. The supplier wants to give the customer a great service. Having the right product at the right time improves the service level.
The supplier also benefits from a VMI.
- Forecasting is made easier by having a point of sale data available.
- The inventory plan allows for easy incorporation of promotions.
- There is a reduction of customer ordering errors.
- Stock orders are visible and help organize priorities.
- The supplier can see a potential need for something before it is even ordered.
- The VMI system allows for increased spare parts and products, which allows for more sales to more customers.
- The VMI savings contribute to more time for the customers, higher profits, and lower costs.
- Neither party has to worry about stock levels being too high or too low.
- The retailer or distributor can reduce their inventory space, while the manufacturer bears the cost of keeping inventory.
- As soon as the vendor managed inventory contract is put in place, the purchasing area of the company has less to do.
- Each truck is filled according to the order of priority, so the items that can run out quickly or often are given priority.
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