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What Is Vendor-Managed Inventory (VMI)? Definition & Benefits (2023)



In the fast-paced world of retail, the crucial task of mastering inventory management can feel daunting. But what if you could delegate the process to a seasoned pro? That’s essentially what happens when your business adopts a vendor-managed inventory system (VMI).

The following will show what vendor-managed inventory is and how it can make it easier to oversee your stock and warehouses, track your supply chain, and free up more of your business’s resources.

What is vendor-managed inventory (VMI)?

Vendor-managed inventory (VMI) is when a vendor, not you or your business, manages all aspects of inventory and supply logistics. The vendor and the business share inventory reports, sales data, and other information to maintain the right stock levels.

VMI can be an effective inventory management strategy for businesses looking to optimize their supply chain and reduce inventory costs. Although it comes with its own set of challenges, careful planning and effective collaboration between retailers and vendors can give you a competitive edge in the market. In fact, retail giants like Walmart and Amazon have vendors and suppliers manage much of their inventory. 

What are the advantages of vendor-managed inventory?

VMI can help you seamlessly manage current inventory and forecast what you’ll need in the future. The benefits of using a VMI system are: 

  • Reduced transaction costs. Vendor-managed inventory reduces the need for purchase orders because the vendor oversees inventory replenishment, and the vendor’s expertise and oversight can help lower administrative costs. The beauty of vendor-managed inventory is that it’s like having a dedicated inventory manager—without the fixed overhead.
  • Optimal inventory levels. With access to real-time sales data, the vendor can ensure there is neither excess stock nor stock-out situations. VMI can also accurately forecast customer demand and adjust supply accordingly, minimizing potential demand and supply gaps.
  • Enhanced vendor benefits. In a vendor-managed inventory model, the vendor has direct access to real-time inventory data, sales trends, and other pertinent information. This information allows them to make more accurate decisions regarding inventory replenishment, improving overall operational efficiency. This level of integration can also result in fewer errors and misunderstandings, removing costly bottlenecks.
  • More efficient workflow. Vendors can manage your inventory more efficiently because of their expertise and focus on this area. This can save you time: By outsourcing to vendors, businesses have a chance to focus their internal resources on core competencies, such as marketing, sales, or product development.
  • Reduce lead time. With the vendor directly managing inventory, the lead time—the time from a new order to delivery—is shortened thanks to a streamlined inventory management system handled by experts, which means leaner and faster fulfillment times.

What are the challenges of vendor-managed inventory?

Although the advantages of VMI are substantial, there are also some challenging requirements, including:

  • A strong foundation of trust. A VMI system requires a significant level of trust and transparency between the vendor and the retailer. The retailer must be willing to share sensitive sales data and other proprietary information, which could potentially expose them to risk. Retailers must also be confident their vendors can handle the increased responsibility of managing inventory, including any future plans to scale. 
  • Substantial upfront investment. Implementing VMI requires an upfront investment in technology and training for both parties. However, it can be a cost-effective strategy in the long run.

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Vendor-managed inventory best practices

  1. Build a trusting relationship with your vendor
  2. Vet potential VMIs
  3. Establish clear metrics, including sales goals
  4. Invest in a software solution
  5. Share all relevant data
  6. Regularly communicate with the vendor

While VMI can work for all business sizes, very small retailers or startups may find the cost and complexity of VMI may outweigh its benefits—especially if you’re working with limited inventory or lower sales volume. However, unique situations like rapid growth plans or a complex inventory might make VMI beneficial even for smaller retailers. Here are some best practices for introducing VMI to your business.

1. Build a trusting relationship with your vendor

VMI starts with trust. You’re entrusting your vendor with sensitive and critical moving parts of your business’s operations. Because of that, establishing a strong relationship with a vendor who understands your business and is capable of managing your inventory effectively is an essential first step.

2. Vet potential VMIs

To find a reputable inventory management vendor, a specialist who understands how to vet VMI providers can play a role. This might involve researching supply chain management companies that offer vendor-managed inventory services. It’s also helpful to look into industry networks, attend relevant trade shows, or use professional networking platforms to identify potential specialists. It’s important to take the time to vet potential candidates based on their experience, expertise, and client reviews to ensure they meet your business’s specific needs.

3. Establish clear metrics, including sales goals

Talk with the vendor to establish what metrics and key performance indicators determine a successful partnership. This could cover how leftover inventory will be handled, and how and when payment for inventory will be processed. Being proactive about establishing clear metrics is important because it sets a plan of action, so that once issues do come up they can be responded to accordingly. Review performance and make adjustments as necessary. This could involve changing stock levels based on sales trends, or it could mean bigger strategic shifts if you’re introducing new products or expanding into new markets.

4. Invest in a software solution

Implementing vendor-managed inventory requires robust VMI software that allows sharing of real-time inventory information and sales patterns, which aids accurate demand forecasting. Don’t hesitate to use inventory software to your advantage. Automating your vendor relationship process is a huge timesaver. 

5. Share all relevant data

In a VMI setup, you’ll need to share key inventory and sales data with your vendor. This might include data such as sales patterns and seasonal fluctuations in demand, inventory turnover rate, and planning for future demand. Once your vendor has access to your inventory data, they’re responsible for analyzing it and determining optimal inventory levels while ensuring overstocked items don’t gather dust and cost you money. With data analyses such as demand forecasting, lead time, and historical sales records, reputable vendors will create an appropriate replenishment schedule. 

6. Regularly communicate with the vendor

VMI isn’t a set-it-and-forget-it endeavor. Regular communication with vendors is crucial to managing changes in demand and supply. Establish communication channels to maintain routine contact and systems to keep records of exchanges. 

Vendor-managed inventory (VMI) FAQ

What should be included in a VMI agreement?

A vendor-managed inventory agreement should outline the responsibilities of both the business and the vendor. It should cover the terms of data sharing, inventory management procedures, and dispute resolution mechanisms.

What is the difference between CMI and VMI?

Vendor-managed inventory places inventory management responsibilities on the vendor, but the retailer generally still owns the inventory. In a consignment-managed inventory (CMI), the vendor owns the inventory until it is sold.

Can VMI be implemented with multiple suppliers?

Yes, vendor-managed inventory can be implemented with multiple suppliers. However, this requires careful coordination and data sharing with all parties.

Is VMI suitable for all types of businesses?

VMI is particularly effective for businesses with complex supply chains or those that experience fluctuations in demand. However, any business that seeks to optimize its inventory management can benefit from VMI.



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