What is Vendor-Managed Inventory? How Can it Help in Supply Chain Management?

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Vendor-Managed inventory is a classical inventory management approach. Despite its numerous benefits, vendor-managed inventory is not widely used by companies. The right implementation of vendor-managed inventory can help businesses in many ways.

By the end of this blog, you will have a clear understanding of vendor-managed inventory and its role in supply chain management. Let’s start the discussion.

What is Vendor-Managed Inventory?

As the name suggests, vendor-managed inventory is an approach in which vendors manage their customers’ inventory. In vendor-managed inventory, vendors manage as many factors of the supply chain as possible. The inventory data, physical counts, and demand statistics are shared with the vendor. Once the inventory levels reach a certain reorder level, the vendor restocks their customers’ inventory for them. In this way, the vendor is responsible for stock management and timely restocking.

Vendor-Managed inventory is a more efficient and cost-effective way to manage the stocks. By entrusting the inventory level management to the vendors, the customers can focus on meeting other business metrics. The vendors can more effectively manage the inventory as compared to the customers. Because the sole responsibility of the vendor is to avoid stock-outs while the customers have to manage many other business responsibilities. Moreover, the orders are smaller and more consistent in vendor-managed Inventory, implying easy warehouse organization and inventory management.

Vendor-Managed Inventory for Supply Chain Management

Vendor-Managed Inventory (VMI) became popular in the 1980s when big names like Walmart and Procter & Gamble implemented it. The idea was a big success for these companies which inspired other firms to use the approach as well.

Vendor-Managed inventory facilitates each step in the supply chain. Let’s explore some of those benefits in detail.

  • Reduced Inventory Costs

Vendors have control over inventory in VMI, they can forecast product demands more. Therefore, the costs of damage, product wastage, and dead stock are eliminated from the inventory. The vendor maintains a record of your stock and plans the orders accordingly. Right planning eliminates the obsolete stock from the inventory, reduces the issues of excessive stocking and stock-outs. Through VMI, you also get rid of the delivery costs.

  • Fewer Stockouts

In vendor-managed inventory, the vendor keeps the customer’s inventory under strong supervision and pushes relatively smaller deliveries to maintain the customer’s inventory level. The companies with vendor-managed inventory almost never face stockouts due to the smaller and consistent product deliveries.

  • Lower Inventory Carrying Costs

In VMI the inventory replenishments are frequent and smaller in quantity, reducing the overall inventory size. Smaller stocks simplify warehouse space management and lower inventory costs. Companies don’t need to have a significant amount of safety stock as a backup. The vendor ensures that the demand is met by restocking the inventory with enough lead time in hand.

  • Efficient Supply Chain Management

The supply chain is a link between different business departments. The issue at one spot affects the whole supply chain. If a manufacturer has to deal with an improperly manufactured batch of products, many orders will be delayed and the whole supply chain will be shaken up. When a vendor is managing the inventory, the risks of any major disruptions are minimized. VMI stabilizes the supply chain optimizing the distribution system.

  • Simplicity Across the Supply Chain

Managing an entire distribution channel accurately requires close attention to the details. With vendor-managed inventory, the staff can do away with inventory-related issues and focus on other aspects of business management. The supplier can achieve significant efficiencies in stock management as the ordering process is more accurate. Reduced-order frequency simplifies the entire supply chain processes.

  • More Sales

Although technology has simplified the reordering process, even with robust systems the conventional ordering process involves educated guesses. Suppliers have a better understanding of the actual customer demands and market fluctuations. Therefore, vendors can communicate the right market trends and equip the customer with the right products to make more sales. The inventory is more aligned with the customers’ demands in vendor-managed inventory.

What to Do Next?

Vendor-Managed inventory seems like a strategic step towards smart inventory management. Understand your business requirements first and calculate the value, vendor-managed inventory solution can add to your business. Analyze the consequences of the approach and how it would affect the overall revenue. Employ technology integrated inventory relationships to further simplify supply chain management. Use an inventory management system to automate and strengthen vendor-customer communications. Make sure to work closely with your suppliers and build long term relationships. Implement the vendor-managed inventory approach and simplify your entire distribution channel management.

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