Advantages and Disadvantages of Vendor Managed Inventory

What Is Vendor Managed Inventory?

The vendor managed inventory definition is a supply chain agreement where vendors or suppliers manage, maintain, and optimize their inventory while it’s in the possession of a buyer.

In other words, it’s an inventory management system where inventory is replaced for the buyer or retailer without them having to initiate a purchase order. The buyer or retailer shares their inventory data with a vendor and the vendor determines order size and frequency. All you have to do is find a wholesale directory and look up some suppliers.

But why on earth would a vendor or supplier go to the trouble of managing inventory that’s out of their hands? What’s in it for them? And how does it work with different types of inventory? Let’s look into how vendor managed inventory works and why it’s beneficial.

How a Vendor Managed Inventory System Works

Vendor managed inventories are owned by the vendor, but located at the buyer or retailer premises. It’s a form of consignment inventory, where a vendor consigns their inventory to the care of another while still maintaining ownership of it.

So, how does vendor managed inventory work? Here’s how a vendor managed inventory system works:

1. Both the vendor and buyer agree on what goals and metrics define success for their VMI relationship. These are usually in-stock performance, inventory turnover rate, and transaction cost. Other parts of the agreement will address whether or not the buyer pays for the inventory on acquisition or on sale to the end user. Along with how excess inventory will be returned.

2. The vendor ships inventory to the buyer or retailer.

3. The vendor monitors the sales patterns and inventory levels of their products at that buyer or retailer.

4. The vendor makes reordering and replenishment calculations based on demand forecasting and lead time.

5. The vendor’s VMI specialist or planner reviews the calculations and places the replenishment orders.

Successful VMI relationships are all about vendors knowing when to replenish their buyers’ inventories. And the key to that is buyers sharing their sales and demand forecasting data with their vendors.

If keeping on top of your inventory has become a major source of stress, with missteps affecting your bottom line, you may want to look into taking a Vendor Managed Inventory (VMI) approach.

Vendor Managed Inventory (VMI) is when a business allows its supplier to fully maintain their inventory levels. Many retailers choose this route as it helps take the guesswork out of managing stock levels. Outsourcing this supply chain task helps the business stay focused on other elements of their operations while ensuring that inventory remains at the right levels at all times.

To decide if a VMI system is right for your business, we’ve compiled vendor managed inventory advantages and disadvantages. Take a look and weigh the pros and cons before deciding if this route works for your business.

Advantages of Vendor Managed Inventory

There are a number of benefits to vendor managed inventory. Here are some to consider:

• Improved efficiency. Having too much inventory can be costly and take up precious real estate on your shelves, while not enough inventory can cost you sales and delay customer orders. Having the right balance is important not only for your budget, but for your shelf space, and your customer satisfaction. What’s more, a VMI system may handle it for you by generating purchase orders automatically, meaning there is less potential for data entry errors.
• Cost reduction. Having to carry extra stock can be expensive, while inadvertently running out can cause disruptions and lost sales. With a vendor managed inventory, there will be fewer orders, no more expensive “rush” orders, and you won’t have to worry about returning overstocks. Your staff also can focus on other tasks, so you can maximize productivity.
• Reduced complexity. Working with a VMI partner to handle your inventory means not having to deal with multiple vendors. With all of that back and forth removed, and a predictable and reliable inventory delivery schedule, it’s fewer details to worry about.
• Improved data insights. As the vendor and business relationship grows, the supplier can anticipate demand and make data-driven decisions to handle seasonal or market trends.

Disadvantages of Vendor Managed Inventory

Before you jump in with a VMI partner, you should also explore some potential vendor managed inventory challenges. These may include:

• Loss of control. Giving over access to your data to a third party can be uncomfortable for some businesses. You might not want your inventory to be controlled by an outsider, especially if you’re unsure of that vendor’s ability to handle your unique needs. Plus, you may have reservations about handing over your data because of security concerns.
• Limited options. Once you go with a VMI partner, it may cause a big disruption to that supply chain should you become unsatisfied with their service. Perhaps you may find other suppliers that are more cost-effective or have better products – but being in a VMI relationship might dissuade you from making a change.
• Less agile market responsiveness. If you feel that your expertise regarding your business’ demand fluctuations is your strong suit, going the VMI route might not be the best option for you. A VMI supplier will work with your data insights, but those might not accurately reflect your sales forecast or your anticipated, sometimes unpredictable, market shifts.

Is Vendor Managed Inventory Right for You?

Vendor managed inventory can be a smart strategy for some businesses, but it’s not necessarily a good fit for everyone. In order to consider if VMI is a good option for you, here are some factors to consider:

• Product type. Think about if your products have long shelf lives, or if they expire. Do you need to carry a variety of products or do just a couple dominate? The more complex your inventory process is, the more likely it is that you may want to bring on some help.
• Demand for the product. Do customer preferences change often in your line of business? Is there a big swing in demand based on time of year or season? Understanding how the market fluctuates can be tricky. In some cases, business owners know best. However, there are also situations in which vendors that have been in the industry for a long time can take the reins and figure out the best inventory levels for your needs, even as they change.
• If outsourcing inventory is better for the company. How has your track record been when it comes to inventory? If you’ve found yourself short on stock or carrying too much on a frequent basis, it could be an indicator that you could use some outside help. If you have a lean staff that needs to focus on other aspects of the day-to-day operations, outsourcing your inventory duties can be a huge burden lifted.
• Vendor reputation. A VMI solution is only as good as the vendor itself. Like most business decisions, it’s important to vet your potential partners. Is this particular vendor used by others in your industry, and are they well-liked? Are they set up to handle your particular needs? Is there a point person who you can always rely on to make changes as needed?

Vendor managed inventory may be an excellent option for businesses that are looking for a cost-efficient way of handling inventory. By reviewing vendor managed inventory pros and cons and then doing your own research on potential VMI partners, you can find a solution that’s best for your company.

This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.

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