Vendor Managed Inventory

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Vendor Managed Inventory (VMI) has consistently provided significant advantages for both the supplier and customer.

For the customer, VMI results in increased profitability due to:

  • Reduced inventory/increased turns
  • Reduced administrative costs
  • Fewer stock-outs or shortages
  • Increased sales (for distributors and retailers)

Reduced Inventory (Increased Turns)

One of the biggest opportunities for customer savings from VMI is the reduced cost of carrying inventory. VMI helps increase turns by reducing the need for safety stock, because:

  • Frequent (e.g. weekly) reviews of demand and inventory information enable close monitoring of order point calculations.

    Also, the supplier is better able to control the lead time component of order point calculations, making them much more accurate.
  • Frequent (e.g. daily) comparisons of on-hand inventory to order point ensures rapid replenishment ordering when stock falls below order point.

    Also, the supplier is better able to maintain order quantity factors such as pack size, so there are fewer problems with order quantity calculations.

Reduced Administrative Costs

VMI fundamentally reduces the cost of purchasing administration for the customer:

  • The supplier takes on most of the responsibility for replenishment.
  • There are fewer rush orders since demand and inventory are monitored more frequently.
  • There are generally fewer orders overall, because of better order calculations.
  • Less buyer effort is needed for maintaining purchasing information, reconciling invoices to purchase orders, and other administrative tasks.

The customer and supplier are using common data, and there is a constant flow of information. For instance: if the supplier changes carton quantity or lead time, the next order would automatically reflect that; or if the customer changes a catalog number by mistake, that would show up in the next product activity report and the supplier would recognize the error.

Typically, over 50% of buyer time can be re-allocated to more value-added functions.

Fewer stock-outs or shortages

VMI improves customer service rates (fill rates) due to fewer stock-outs. Primarily, VMI does this for the same reasons it reduces the need for safety stock:

  • Because the supplier now has full visibility of true demand along with better information about factors such as lead time, product launches, and packaging changes, they can better manage order calculations.
  • As a regularly scheduled automatic process, VMI will almost always recognize the need to replenish before stock is out.

In addition:

  • A supplier's VMI planner is more likely to investigate and respond to unusual occurrences in demand or inventory since they are probably managing fewer items than the typical customer buyer who is often managing items from hundreds of suppliers.
  • Suppliers often favor VMI customers in times of scarce supply in order to meet agreed objectives.

Increased Sales

As described above, VMI offers the benefits of improved turns, reduced administrative costs, and fewer stock-outs to all types of customers: including distributors, retailers, OEMs, and product end users. 
But for distributors and retailers, VMI also helps increase bottom line performance by helping to increase sales.

  • Fundamentally, fewer stock-outs mean:
    • Fewer lost sales opportunities (i.e. greater near-term sales).
    • Improved customer loyalty (i.e. greater long-term sales).
  • In addition:
    • An improved product mix based on better demand visibility means always having "the right product, in the right place, at the right time".
    • Better collaborative planning with the supplier for promotions, new product introductions (NPI), and exceptional demand (such as project work) etc. allows the distributor or retailer to take full advantage of special sales opportunities.
For both parties, VMI also provides:
  • Better information for planning (e.g. demand visibility)
  • A closer, more effective working relationship - both parties work together to sell more to and/or better serve end customers