The Concept of Vendor Managed Inventory (VMI)

The concept of vendor managed inventory (VMI), is a business model in which the buyer of a product provides certain information to a supplier or vendor of that product at the supplier takes full responsibility to maintain the certain Inventory level of any SKU at the location of your buyer’s consumption; either it is a store, a third-party logistics provider (3PL) also involves in to ensure that the buyer has the required level of inventory by adjusting the demand and supply gaps as an interdependent relationship. Likely, a store will unintentionally have a shortage of any product and inventory level. 

Further, there is a chance of shortage of inventory nowadays, local modern traders keep high inventory levels of around all the products, they purchase in a bulk quantity to avoid out of stock which directly affects the customer’s perception. Therefore it is nowadays the responsibility of vendors to maintain the sufficient inventory level of their products. 

Elements for Effective VMI (Vendor Managed Inventory)

• Integration 

Proper Integration of ERP (Enterprises Resource Planning) and WMS (Warehouse Management System) is very necessary to integrate these two software to get an efficient inventory management system.

• Transparency  

Based on a high level of trust, transparency is built while integrating the supply chain with customers. According to this view, the 3PL provider can monitor demand on an accurate basis and meet that demand with the inventory. 

• Control

The control over the inventory of customers is in the supplier’s hand to ensure predetermined service levels are maintained. With this aspect, the customer has a passive in the Supply Chain effectively. VMI is also called a measure which should be taken collaboratively or if it is a solution imposed on the supplier by the customer (retailer) with only providing an effect on the latter. 

One of the keys to making free work is shared risk in some cases if the inventory does not sell the vendor supplier will repurchase the product from the buyer. Business is scan-based trading was usually applied but its use is not mandatory this is one of the successful business models used by Walmart and many other big-box retailers oil companies often use technology to manage the gasoline inventories of the service stations that they supply seepage. 

Advantages of VMI for Supplier & Customers

• The chance of error is reduced due to system to system communication along with the high speed of processing. 
• The main benefit of VMI is to make available the required product at the right time, and both parties are involved to satisfy the end customer need. 
• Long term partnership is developed between the supplier and customer because of working together. 
• Purchase orders are issued based on predetermined specs, quality, and other terms. 
• Forecasting becomes easier by observing data of the customer’s point of sale. 
• Cost is also decreased at the end of the customer as the responsibility of planning and ordering shifted to the supplier’s end. 
• There is a reduction in customer order errors that may be observed which can cause a return in the future. 
• The focus of supplier’s increases than ever due to managing customer’s inventory. 
• Priorities can be set because of visibility to inventory levels.

FAQ

Q1. What is VMI process?

Ans. The VMI and collaborative replenishment is a strategy to avoid stock out issue in the Supply Chain which may result in loss of sales and decrease in market share through making the responsibility of the vendor to fulfill the inventory level before stock out.

Q2. Which companies use Vendor Managed Inventory?

Ans. The retailers on a large scale and superstores such as modern trades use Vendor Managed inventory to avoid stock shortages and fear of losing market share for the satisfaction of customers. Walmart is the biggest example of using the VMI concept.

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