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Vendor Managed Inventory and Collaborative Replenishment

By Anthony Liu and Rosita Johnson


Vendor Managed Inventory (VMI) and Collaborative Replenishment are two supply chain strategies that can help companies reduce inventory costs, increase efficiency, and improve customer satisfaction. VMI is a supply chain practice where a vendor takes responsibility for managing the inventory for their customer. The vendor monitors inventory levels (Re-Order Point, Min/Max, Safety Stock), and generates and monitors replenishment purchase orders. This approach can improve supply chain efficiency by lowering inventory holding costs, reducing stock outs, and streamlining the purchase order process.


VMI is an important strategy to optimize supply chain inventory management, where vendors and customers establish long-term cooperative partnership, based on information and knowledge sharing. The VMI model is being adopted by an increased number of businesses, applicable to a variety of industrial and commercial enterprises.

Main Characteristics

  • Based on information sharing,vendors obtain point-of-sale data from customers and use this data to coordinate stock replenishment order volumes. In retail industry case, vendors plan their production and inventory activities in line withthe actual sales activities of retailers.

  • The vendor completely manages and owns the inventory until it is sold by the customer, but the customer has a duty of care for the stock and is responsible for any damage to the stock.

  • The vendor can predict the demand according to the data of the sales point, determine the order quantity more accurately, and reduce the uncertainty of the prediction. This leads to reducedholding cost, including warehousing, handling, and obsolescence. On top of that, the vendor can respond to the user's demand faster, improve the service level, and reduce the user's inventory level.

Benefits of VMI

By implementing VMI, the inventory management is left to the experts. The inventory is managed by the vendor under a collective agreement, and the implementation of the agreement is constantly monitored. The contents of the agreement can be modified as needed, so inventory management can be continuously improved.


With an effective VMI system, the benefits are shared for both parties. Some of these benefits include:

  • Ensuring the necessary parts are ready and available when needed

  • Fewer resources dedicated to inventory

  • Better inventory turnover rate

  • Reduced administrative costs

  • More stable supply chain

  • Close communications and partnerships between customers and suppliers

  • Retailers have more recourses (time, money, and labor) to focus on sales

Types of VMI

Often, one vendor-managed inventory model could focus on just one product or control a retailer’s entire inventory. VMI is a broad term that covers various tasks and duties involving inventory management. The type of VMI system you use depends on the nature and ambitions of your business.


Here are some examples of different types of VMI:

  • Vendor-led physical checks: This is where a vendor shows up to check stock levels in a store and replenishes where needed. Small businesses such as local convenience and hardware stores often employ this model.

  • Buyers/customer ordering inventory: as the name suggest, the buyer can still order inventory, often periodically, and the vendor delivers the products when requested.

  • Synchronized inventory systems: This is more suitable for small-to-medium businesses, and has the potential to be the most efficient choice. This is where a buyer (customer).

  • On-site inventory planner: A vendor provides a planner staff on-site at the buyer’s location who manages inventory. Commonly, businesses with a wide range of products such as supermarkets and department stores can benefit from this type of mode.

Implementation Factors

The implementation of VMI should pay attention to the following factors:

  • Trust. Such partnership requires a certain amount of trust, or it will likely to fail. Disruptions could only be solved through mutual trust, cooperation and communication.

  • Technical support. The timeliness and accuracy of data transmission be only be guaranteed with advanced, responsive, and stable information technology.

  • Inventory ownership. Before deciding who will make the replenishment decision, ownership is also transferred when the customer receives the goods, and it is now a consignment relationship in which the vendor owns the stock until the goods are sold. Also, due to the increase of supplier management responsibility, the cost increases. Thus, the two sides have to negotiate the terms, so that the overall inventory decreases.

  • Payment of funds.Businesses that used to pay for goods one to three months after they received them, may now have to pay for goods after they are sold. Payment terms are shorter, and companies may have to adapt to avoid financial issues.


Conclusion

With traditional purchasing and stocking methods, sales are predicted, and inventory is ordered based on the forecast. This method comes with risks of buying too much or too little. In the event of too little inventory, a risk may be present if the business cannot meet the higher-than-expected demand and lost sales may occur. Too much inventory will tie up money and can cause warehousing (cashflow) issues.


VMI breaks the traditional inventory management mode. It embodies the integrated management thought of supply chain and adapts to the demand of market change. It is a new and representative inventory management thought. At present, VMI plays a key role in the distribution chain, and more businesses are starting to pay attention to it.

 

ASCI specializes in helping businesses like yours to address supply chain management challenges, including managing our customer's inventory. Visit our website to learn more and to arrange for a free consultation.

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