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Vendor Managed Inventory: Detailed Guide for 2024

3 minutes

In this article, we talk about what vendor management inventory is and how it works. We also provide a simple step-by-step framework to help you implement it, with real-world examples. Read on to learn more.

vendor managed inventory

What Is Vendor Managed Inventory?

Vendor-managed inventory (VMI) is a supply chain management approach where the supplier, rather than the retailer or manufacturer, takes the lead in deciding order quantities and timings. This system is designed to enhance inventory visibility and reduce inventory-related costs for both parties.

Real-World Example: For instance, a grocery store collaborates with a vegetable supplier. Rather than specific orders for lettuce, the supplier monitors the sales and stock data of the grocery store, delivering 2,000 heads of lettuce each time the inventory drops below 500 heads.

Vendor Managed Inventory Benefits

Vendor-managed inventory offers multiple advantages for businesses, which include:

Inventory Reduction: VMI optimizes stock levels, reducing excess inventory costs. Retailers save on storage and reduce wastage from unsold goods.

Enhanced Service Levels: With timely restocking, the chances of stockouts decrease. Customers enjoy better product availability.

Stronger Vendor-Retailer Relationship: Trust grows when vendors actively participate in inventory management, leading to better collaboration and mutual benefits.

Cost Savings: Both parties can reduce costs related to ordering, transportation, and handling due to more predictable and streamlined processes.

Improved Sales: Consistent product availability can lead to better sales and customer satisfaction.

Efficient Use of Technology: Advanced systems, like EDI, offer real-time data sharing, facilitating quick decision-making and adaptive operations.

vendor management inventory

How Does Vendor Management Inventory Work?

VMI is a strategic approach that uses data and collaboration to optimize inventory processes. Here’s how it works:

Data Sharing

Retailers use inventory systems to track sales and stock. In VMI, this data is shared with vendors, giving them real-time insights into demand patterns. This transparency helps both parties align strategies and forecast effectively, streamlining operations.

Order Decisions

Instead of retailers ordering stock, vendors use the shared data to proactively determine inventory replenishments. Vendors optimize stock levels based on analytics, ensuring the retailer is neither overstocked nor understocked. This proactive approach reduces costs and enhances sales opportunities.

Technological Integration 

VMI requires advanced technological collaboration. Tools like Electronic Data Interchange (EDI) enable businesses to swap crucial documents, like orders and invoices, electronically and error-free. This integration, along with cloud systems, ensures quick, accurate data access for both parties.

vendor-managed inventory

4 Simple Steps to Implement Vendor-Managed Inventory

Implementing VMI requires strategic planning, technology, and collaboration. Here’s how we do it, simply follow the steps below:

1. Stakeholder Alignment

Both parties must agree on the VMI approach and its goals. Open dialogue ensures a smooth start.

Example: MobileMakers, a phone retailer, meets with ScreenGuard Manufacturers. Together, they discuss and agree on how best to manage inventory.

2. Define Metrics 

Set clear numbers for stock levels and when to reorder. This clarity guides the process and sets expectations.

Example: DressFab decides to keep 500 dresses on hand. When only 100 remain, it's time to reorder.

3. Integrate Technology

Use modern systems to share data efficiently. This technology keeps everyone updated.

Example: CarZone Dealers uses a system to share sales figures with TyreWorld. This ensures TyreWorld knows when to supply more tires.

4. Continuous Monitoring and Feedback

Regularly check the process and adjust if necessary. Keeping an eye on things helps maintain efficiency.

Example: BakeryBliss reviews its flour usage with GrainMasters each month. If they notice changes, like higher sales in winter, they adjust their orders accordingly.

Case Study

FreshFruits Inc. wants to optimize its inventory of imported fruits. With unpredictable sales, storage costs are skyrocketing.

They decided to implement our 4-step framework implement the VMI system: 

Step 1: Stakeholder Alignment

Before diving into the VMI system, FreshFruits ensures both parties understand and agree on the approach. They sit down with TropicTreat Suppliers, discussing their challenges and goals, and together they formalize a VMI partnership that will benefit both businesses.

Step 2: Define Metrics

It's essential to have clear, actionable numbers guiding the inventory process. FreshFruits and TropicTreat decide that once the banana stock decreases to 500 bunches, a reorder is necessary. This threshold ensures FreshFruits never runs out, while also preventing overstocking.

Step 3: Integrate Technology

Efficient data sharing is the crux of VMI. FreshFruits uses a cloud-based inventory system to provide TropicTreat with real-time sales and stock data. This technological collaboration ensures TropicTreat always has accurate insights to respond promptly.

Step 4: Continuous Monitoring and Feedback 

The business landscape is dynamic, and adjustments are often needed. FreshFruits notices that during the summer, fruit sales spike. They communicate with TropicTreat to adjust their restocking numbers, ensuring the inventory caters to the seasonal demand surge.

Leveraging VMI can be pivotal for sustainable growth and profitability for your business. We hope this article has given you a better understanding of vendor managed inventory and how to implement it effectively.

If you enjoyed this article, you might also like our article on different ways to store inventory or our article on vendor management inventory agreement. 

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