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Guide to vendor managed inventory

Explore the advantages and disadvantages of vendor managed inventory

What is vendor managed inventory explained?

Vendor managed inventory (VMI) is a supply chain agreement. It’s where the manufacturer or supplier takes control of the inventory management decisions for the seller or retailer. You often see this in big organisations such as Amazon and Walmart who have lots of third-party sellers. In supply terms this means the upstream agent is responsible for the inventory of the downstream agent. This type of agreement is also known as managed inventory, continuous replenishment program, or supplier-assisted inventory replenishment.

To help make VMI systems a success, consider the following four steps when thinking about implementing the systems:  

  • Upstream and downstream agents will need to plan collaboratively
  • Focus on quality forecasting, safety stocks, lead time, service level and ownership issues
  • Implement the VMI system together
  • Continuously review the VMI system and identify improvements
 

What are the benefits of vendor managed inventory?

Vendor managed inventory can help streamline processes. Here are some benefits that vendor managed inventory has and will bring to your organisation:

  • VMI promotes ‘demand smoothing.’ The VMI information enhances customer requirement forecasting, which facilitates better production planning to meet demand.
  • A VMI supplier can control downstream decisions that can help transportation decisions.
  • VMI promotes long-term relationships, due to the costs of switching suppliers.
  • VMI helps to improve customer experience, as vendor managed inventory helps to avoid stock outs, which can be frustrating for customers.
  • It can help with transparency and letting customers knows where the product came from and how it was built.
 

What is a disadvantage of vendor managed inventory?

Before entering into a vendor managed inventory agreement, it’s important to consider the challenges it has.

  • VMI programs and admin costs are costly which can reduce working capital.
  • Implementation of VMI can go wrong due to the technological capabilities of inventory tracking.
  • Dependence on one supplier that uses VMI can be costly if performance degrades.
  • As the supplier, you lose control as distribution is handed over to the retailer or seller. So, it’s important to enter an agreement with a trusted and experienced distributor.
 

Examples of companies that use vendor managed inventory

Big organisations and retailers use vendor managed inventory, and it has proved effective, especially for the likes of Amazon.

In 2017, Amazon generated more than $177 billion in sales, and year on year business is booming. But how are they so successful and how do they manage their billions of products?

One of their strategies is using a vendor managed inventory. With so many items to manage, Amazon doesn’t need to manually place purchase orders when stock runs lows. It allows the suppliers to take care of their own products, as many products are sold by third party sellers. These third parties send their inventory to Amazon and the rest is taken care of. Vendors can then track inventory levels.

Other companies that use vendor managed inventory are:

  • Walmart
  • Home Depot
  • Bosch
  • Procter & Gamble 
 

What is operations management?

Operations management is a key area within any organisation. It plays a key role in keeping supply chains operational in today’s challenging environment. Discover the key to success when thinking about operations management. Find out more about Operations Management

Operations management key themes

Logistics Management Just in time Advantages disadvantages Obsolesence
Lean manufacturing Warehousing Warehousing management Inventory management

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