Walmart uses it. So does Home Depot. So do a number of oil companies.
We’re talking here about the practice known as vendor-managed inventory.
Vendor-managed inventory (or VMI) is a process in which the buyer of a product provides information to a vendor, and the vendor then takes responsibility for maintaining a set inventory of their product at the buyer’s location.
Writing in Industry Week, Traci Purdum uses the example of Walmart. Vendors that went to the retailer to sell their products are responsible for getting those products onto the shelf and making sure Walmart has no shortage or overstock.
“For the distributor, it means less work and less risk,” Purdum writes. “For the supplier, it means inventory is set up how and where you want it, and you have the opportunity to educate associates and employees about your wares.”
Let’s take a closer look at the benefits of vendor-managed inventory.
How Companies Benefit From VMI
Normal supply chain management focuses on ways to save internally.
“VMI takes a broader perspective,” says business writer Robert Moskowitz, “recognizing that your inventory system extends all the way into your suppliers’ operations.”
When they work more closely with suppliers and give them more responsibility for managing their inventory, companies can vastly lower the size of that inventory, and also shorten the delays between when they get an item and when they’re able to sell/use it. This leads to reduced inventory costs.
VMI can also benefit your suppliers. It gives them the chance to integrate their operations with yours, which then creates an opportunity to develop ways to streamline the flow of products to buyers.
As Moskowitz notes, this brings “a boatload of advantages” to suppliers:
- It lowers the cost of sales.
- It locks their customers into continued – and possibly larger volume – purchases.
- It lets them plan and adjust their output to suit demand.
- It helps them project production requirements and gives them more control over their costs.
All of this adds up to a formula for greater profitability.
VMI also helps the supply chain run more smoothly.
When suppliers and buyers operate in separate bubbles, there are a number of ways that errors, waste and inefficiencies can occur, including:
- Purchase limitations that don’t qualify for larger volume discounts.
- Responsibilities for monitoring/managing inventory, initiate purchase orders, handle inbound shipments, replenish stock and deal with sales staff.
- Requirements to purchase in less-than-optimal quantities.
But when the supplier takes responsibility for inventory, these problems go away. The buyer suddenly has fewer things to worry about and is able to count on always having sufficient inventory.
VMI helps you optimize your inventory mix as well. You may find yourself maintaining an inventory of many different products, keeping count of each one, and anticipating when to order to make sure you’re not stuck with a shortage.
Again, from Moskowitz: “When suppliers and customers establish VMI, however, the whole effort becomes simpler. As long as the customer informs the supplier of anticipated production quantities, the supplier can easily adjust deliveries to keep inventory levels up to agreed-upon minimums.”
Among the other benefits VMI offers:
More efficiency. Not every business is good at inventory management. By outsourcing it to your vendors, you’ve given yourself one fewer problem to worry about.
More flexibility. If your customers have irregular ordering patterns, VMI can help you handle what’s known as “lumpy” demand.
Fewer lost sales. If something is out of stock, that’s, of course, a lost sale. VMI can help your business avoid that loss, and keep that profit.
Less complexity. If your business requires a variety of inventory components, keeping track of all of those pieces could be a full-time job. VMI gives that job to your vendors, who are likely going to be more familiar with those products than you.
If you think vendor management inventory is right for you, reach out to Mars International. We use tactics such as pre-purchasing and stocking components leveraging component and material purchases across projects and factories, consolidating shipments, pre-purchasing and stocking your products in our US warehouse, drop shipping to your distribution centers, or implementing special supply agreements.
Running a business is complicated. Let us help make it just a little simpler.