What is VMI?

VMI enables businesses to form a collaborative approach to enhance relationships

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Vendor Managed Inventory is the process where the supplier manages inventory levels for their trading partners, generating orders based on mutually agreed objectives and demand information sent by their customer.

Vendor Managed Inventory (VMI) is a streamlined approach to inventory management and order fulfillment. VMI involves collaboration between suppliers and their customers (e.g., distributor or retailer) which changes the traditional ordering process.

The goal of VMI is to align business objectives and streamline supply chain operations for both suppliers and their customers. The operational benefits that can be leveraged by those companies operating a VMI software solution are:

History of VMI

In it’s most basic form, VMI began life when retailers began looking for help from their suppliers to manage inventory levels. Initially, it was a manual process where suppliers would manage products within the retailers by sending a representative with a notebook and pen to record stock levels. These manually recorded stock levels would then be returned to the supplier where they would arrange with the store to deliver more stock if required.

Fundamentally this is the basis of VMI today, however, technology now replaces the manual processes and automated forecasting takes the place of people making decisions.

Modern VMI brings together multiple data streams to speed up and optimize stock levels at a retailer. In order to achieve this, there has to be a mutual agreement between the retailer and supplier to use VMI and subsequently share the relevant data.

Once an agreement has been met, the next step is for the retailer to share data with the supplier, this data usually provides:

Stock levels

In order to achieve the most basic VMI functionality, stock level information is required to keep the supplier updated about reducing stock levels.

Logistics timescales

Accurate forecasting can only be realized by building logistics timelines specific to that particular supply chain into the model.

Seasonal trends

An additional layer of intelligence can then be added to the forecasting model by taking historic seasonal trends from the retailer and feeding those into future stock level forecasts.

Short term trends

Achieving the next level of optimization can then be achieved by monitoring short term trends in the data that can be triggered by external factors such as the economy or even the weather.

When all this data has been shared and built into the forecasting model, the VMI solution is ready to be made live. The platform then automatically takes all of these data inputs and produces accurate recommendations to the supplier who are then equipped to send stock at the optimal time.

Many of the largest retailers and manufacturers in the World use VMI to optimize their supply chains. This is because the increased sales that are achieved through such a solution easily outweigh any associated costs. Whilst the increase in sales is an obvious outcome of having optimized stock level on the shelves at all times, there are also some less obvious benefits.

Improved Inventory Turns

Another benefit realized through VMI is what is called improved “inventory turns”. This refers to stock turnover or the movement of stock, in other words, how many times a company has sold and replaced inventory during a given period. By having increased movement of stock, retailers can often free up warehouse space.

Improved Service

Lastly, by providing optimized deliveries, stock levels, turnover and ultimately sales, the knock on effect is improved services level and relationships with customers.

VMI should be considered when stock has a high turnover and especially when the products involved can be subject to fast changing sales trends. VMI is also indispensable for large retailers with multiple suppliers that each require careful stock management.

Most of the largest retailers and manufacturers in the World use VMI to optimize stock levels but businesses don’t have to be large to benefit from the solution. As smaller businesses realise the benefits VMI offers, many of these companies are now adopting VMI to increase sales and service levels.

While VMI allows the supplier to manage the deliveries and subsequent stock levels of the retailer who purchases the products as part of the process, consignment stock describes the process whereby the retailer controls stock levels but the stock is still owned by the supplier whilst it’s in the retailer's warehouse.

These two processes are not always mutually exclusive. In a VMI relationship the supplier sometimes still owns the inventory but they have the added value of replenishing the inventory which can help prevent overstocking and in some cases shrinkage. VMI adds a much more collaborative approach between the retailer and supplier which puts less pressure on the supplier's cashflow.