Vendor Managed Inventory - Basics and Advantages

What is Vendor Managed Inventory?

Vendor Managed Inventory (VMI) is a supply chain practice. The stock or inventory is monitored, planned and managed by a vendor on behalf of a consuming organization. The vendor does this based on expected demand and previously agreed upon minimum/maximum stock levels.

VMI had its beginnings in the retail business in line with Efficient Consumer Response (ECR). In ECR, the consumer expectation of stock availability gives an advantage. Wal-Mart pioneered this strategy in the retail sector and today it is being used by several companies even in other sectors.

Advantages of Vendor Managed Inventory

The advantages of VMI can be broadly classified into cost, delivery, and quality. The advantages of VMI can be overlooked if supply chain managers keep a narrow focus on the benefits as they relate to their own companies. Supply chain experts are of the opinion that the real benefits of VMI come with driving a lean supply chain centered on creating an end-to-end pull system, which is based on end user demand cascading through the chain.

Cost Advantages of Vendor Managed Inventory

The vendor holds stock on site or near the customer. This gives the customer almost-instant access and the ability to pull stock as needed and only pay for that which is consumed, thereby reducing stock investment and increasing stock turnover.

The vendor is responsible for replenishing stock in most VMI partnerships. This includes ordering the stock, managing the logistics and freight to ship the material, as well as stocking and counting the stock. By passing on these expenses to the vendor, the customer can reduce overall costs.

Another advantage of VMI is that it separates demand variations and forecasting errors between upstream and downstream supply chain partners. Such decoupling eliminates the practice for every supply chain node to buffer its stock position. This helps reduce the stock levels and the linked costs of maintaining the stock.

With VMI the customer can pull stock in the quantities necessary to meet consumer demand. Therefore there is no need for minimum order quantities. The vendor can restock based on pre-specified minimum-order quantities internal to its company. Moreover, because the vendor is responsible for stock liability it becomes more of an incentive to eliminate requirements that push excess stock and cost into the supply chain…