5 Ways VMI Can Help Improve Your Supply Chain for a Recession


February 27, 2023

Economic uncertainty and sharply rising inflation rates have many businesses considering what strategies they can use to prepare for a recession. Supply chains are particularly vulnerable to recessions, with impacts ranging from poor demand forecasting to slashed profits. Finding ways to recession-proof your supply chain can help you prepare for what’s next and stay competitive into the future.

Experts say two keys to recession-proofing supply chains are leveraging data and investing in automation. One tool for accomplishing these goals is Vendor Managed Inventory (VMI). VMI uses mutual, agreed-upon business objectives to empower suppliers to suggest orders for distributors. Using VMI in a recession enables your business to streamline inventory management, improve forecasting, and eliminate stockouts — all benefits that can keep your company competitive throughout a recession.

How a Recession Could Impact Supply Chains

As a supply chain professional, you can’t afford to use guesswork as you forecast demand and replenish inventory. Events like a recession can derail supply chains and make costs challenging to control, cutting into your revenue and creating uncertainty. Your supply chain could face the following challenges during a recession:

Inaccurate Demand Planning

Typically, successful supply chains are demand-driven. A supply chain manager uses recent buying trends to forecast demand and order products from suppliers. This process creates a lean supply chain that minimizes overstock and improves in-stock rates.

However, a recession can make it challenging to forecast demand accurately. The high inflation and unemployment rates that characterize recessions lead to a slowdown in consumer spending and decreasing demand. Yet demand is often fickle, and lowering inventory only to find that demand remains the same could lead to stockouts. If your company can’t leverage predictive analytics to track and respond to changing demand, you might be left predicting demand with outdated information and overstocking or understocking your inventory.

Reduced Cash Flow

One of the most significant impacts of a recession on the supply chain is a drop in sales. Some companies have embraced bulk ordering over the last few years to handle product shortages better. However, having excess inventory on hand when a recession strikes could lead to high storage costs and force companies to reduce prices on surplus stock. Businesses desperate to keep inventory moving may pause or cancel orders from suppliers to maintain cash flow, potentially harming their relationships with suppliers.

Difficulty Scaling

A recession can also have lingering effects on businesses, even into economic recovery. Scaling depends on a company’s ability to work efficiently. A recession is characterized by rising unemployment levels, which could impact your workforce and ability to maintain service levels. A lack of labor can undoubtedly affect your ability to scale after a recession.

A recession can also decrease profit margins, making it difficult for you to invest in new processes and technologies that will increase efficiency. Relationships with suppliers and customers will also affect your ability to scale once the recession has passed.

5 Ways VMI Can Support Your Supply Chain

Your company needs efficient tools to overcome the challenges of a recession. Implementing VMI provides real-time inventory visibility and streamlines order management and fulfillment so you can stay ahead of the recession and prepare for long-term success. Consider a few ways your company can improve its recession readiness with VMI:

1. Automated Replenishment to Do More with Less

Automation is the key to maintaining a finger on your inventory’s pulse. Replenishing stock used to require faxing orders, manually entering information into an inventory system, and waiting for suppliers to read and accept the order. Automation has revolutionized replenishment by streamlining inventory management and order processing.

person checking inventory

Whether your team is lean or customer demand spikes, automating replenishment tasks with VMI reduces the burden on your company and increases efficiency. VMI automates several key business activities, including sharing inventory data with trading partners and creating replenishment orders. A VMI solution receives data on sales and inventory positions. It processes the data to generate a recommended action based on mutual business objectives like replenishment frequencies and minimum/maximum shelf presence. With VMI in place, you can streamline replenishment and ensure timely order fulfillment.

2. Leveraged Machine Learning for More Strategic Decisions

Maintaining a competitive edge during a recession requires using advanced insight to make more strategic decisions. Managing your supply chain with assumptions and old data isn’t beneficial during good economic times and can be especially damaging during a recession. It can be easier to make strategic decisions if you leverage the power of machine learning. Predictive analytics is a powerful tool for gaining critical insight into your inventory and making impactful supply chain decisions.

A VMI solution provides real-time data to bring increased visibility into customer needs and inventory movements. The VMI platform gathers data from downstream buyers, sends it to upstream suppliers, and uses predictive forecasting and advanced algorithms to determine when buyers need to order a specific product. Many businesses have benefitted from the machine learning of VMI. For example, Conn’s HomePlus leveraged TrueCommerce’s VMI solution to reduce product returns and stockouts, improve truck utilization, and increase ROI.

3. Allocated Products Based on Customer Needs

The ability to respond to customer needs is essential for creating a demand-driven supply chain. As demand changes before, during, and after a recession, you need the ability to allocate the right amount of inventory to the correct locations to keep up with demand, avoid stockouts, and stay competitive when stock is in short supply.

Some VMI solutions include inventory allocation and available-to-promise (ATP) tools for optimizing your inventory availability where it’s needed most. TrueCommerce’s VMI solution can help you allocate inventory by using allocation locations, analytics, and set item quantities to distribute inventory across a distributor’s locations. This feature enables you to respond to customer needs in real time.

4. Increased Forecast Flexibility

Excess inventory is an investment you can’t afford to lose during a recession. Tying up your cash flow in overstock is a significant problem, which is why the ability to forecast demand in real time is so valuable. To optimize your supply chain, you need to be able to pivot quickly as conditions change.

VMI provides increased forecast flexibility by giving you a real-time view of your actual inventory data and sharing inventory data between trading partners. With the insight from a VMI solution, you can reduce your inventory investments, like safety stock, when needed. VMI also enables companies to ensure full shelves at distributor locations to maximize sales and reduce stockouts.

5. Reduced Impact of the Bullwhip Effect

A potential impact of poor supply chain management is the bullwhip effect. The bullwhip effect occurs when each party in a supply chain responds to a small spike in customer demand by inflating their orders to gain product buffer. While this tactic may help improve in-stock rates if one party does it, when multiple parties add to their orders, it creates inaccurate forecasting, overstock, and stockouts later. Supply chain complexity, batched orders, and ration gaming can all create the bullwhip effect.

The impact of the bullwhip effect on a supply chain during a recession includes increased storage costs, poor cash flow, and unmet customer expectations. VMI controls this effect by providing suppliers with real-time sales data from their downstream partners to maintain the right stock level. By balancing inventory for trading partners, VMI allows suppliers and buyers to work together to avoid overstock and stockouts.

Use VMI to Prepare Your Business for a Recession

person standing in a warehouse

When an impending recession threatens supply chains, you can take several steps to prepare your business for economic uncertainty. VMI enables you to harness the power of machine learning to improve replenishment, avoid overstock and stockouts, and make strategic decisions.

TrueCommerce offers a comprehensive VMI solution featuring tools to help trading partners optimize their supply chains and create more effective, demand-driven supply chains that can withstand a recession. To see our VMI solution in action and understand why more than 20,000 locations trust us, contact a VMI specialist today.

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