For operating a business in any capacity, you need to streamline your day-to-day operations, reduce costs, and derive business growth. There are a lot of inventory models to achieve efficiency with the lowest operational costs that you can choose from. One such practice is Vendor Managed Inventory Model (VMI).
Vendor Managed Inventory Model (VMI) is a B2B strategy between businesses and vendors that can help you significantly save up on working capital and reduce the time and money involved in inventory management.
Now, that sounds promising! Let us now understand what exactly a VMI model is and how it works.
In a traditional business setup, retailers buy products on their own and replenish them based on forecasted sales and current inventory availability. However, in a VMI model, vendors keep track of retailers’ inventory, check the sold/unsold products, and fill the space allocated accordingly.
All merchandising decisions are made based on consultation with the retail store teams.
Here is an infographic that explains this clearly.
The vendor is responsible for managing inventory plans, ensuring optimal stock availability at all times, and generating the Purchase Order (PO) for replenishment. Therefore the term – vendor-managed inventory.
Of course, the retail store has to approve the replenishment orders since it’s their display space being utilized. The biggest point to note is that the ownership of the inventory remains with the vendors.
The goal of setting up Vendor Managed Inventory (from retail stores perspective) operations is to:
- Reduce inventory levels at retail stores
- Avoid stock out situation
- Improve inventory turnover
- Improve sales and customer service
- Reduce inventory holding costs at the retail store’s balance sheet
The Vendor Managed Inventory enables a vendor to manage lead time for supplying goods in retail stores. This, in turn, helps storekeepers reduce their inventory level and stock-out situations.
Based on customer demand, the vendor supplies products in batches to the retailer and helps them easily store and track the exact count of stock required. With this, the inventory turnover improves along with customer services. However, retail stores need to monitor the entire inventory flow into their stores to avoid inventory dumping by the vendors.
But what if you are already meeting the above goals without using VMI?
So let me throw some light on what actually the process is and how it can improve the workflow with improved profitability.
VMI is demand-driven. A customer places orders with a supplier for the products that they will need. This implies that the customer is able to estimate and control the timing and size of orders according to the inventory pipeline. The supplier receives digital data indicating requirements. They will match what the customer already carries against the stock quantity and then generates inventory replenishment orders.
Traditional retail store operations involve several aspects including:
- Dealing with suppliers and shipment processes to ensure product availability across sales channels
- Inventory management
- Staff management
- Store arrangements
- Billing and money handling
- Ensuring good customer service
- Store display to attract customers, plus, a lot more
It requires a lot of work to be done on the retailer’s side. The VMI model helps you reduce your burden and lets you focus on your core competency and drive business growth.
Vendor Managed Inventory as a Solution
Vendor Managed Inventory is a solution towards improving the supply chain processes at both retailers’ and vendors’ ends.
Here’s how it works:
- Supplier monitors the inventory level of stores and keeps them stocked up with the right SKUs.
- Payment terms will need to be agreed upon according to mutual understanding. So, the store owners will not be required to manage their own supply and inventory management process. This here is taken care of by the suppliers.
Benefits of VMI for Retail Stores
As discussed already, the VMI model helps retailers improve inventory management and drive business growth. Here is the list of major VMI benefits for retailers.
- Ensures Optimal Stock Availability at All Times
The vendor takes full responsibility for your inventory levels and keeps all products stocked up on a timely basis. Without VMI, retailers will always have to be aware of reorder points to place a purchase order and miss on their deliveries.
- Improves Time and Work Management
In retailing, along with daily business work also includes managing inventory, noting down the reorder points, creating purchase orders for replenishment, and so on. Using VMI, these tasks can be excluded, allowing you to focus on other productive business needs like online channel management, introducing new products, or coming up with new marketing tricks.
- Eliminates Stock Out Losses
VMI opens up the path for suppliers into customers' product demand and diminishes the uncertainty involved with the inventory status. This, in turn, eliminates last-minute orders since the supplier has the ability to restock the customer’s inventory without any interruptions.
One important thing to note here is that retailers should not blindly depend on suppliers and must deploy a monitoring mechanism on inventory thresholds.
But why would a supplier want to help the retailer stock up their inventory? What benefit does the supplier get by helping the retail stores?
Below we discuss the benefits that vendors get by implementing VMI processes with their wholesale clients.
Benefits of VMI for Brands and Suppliers
- Inventory Transparency
Access to retailers’ inventory helps suppliers easily analyze the demand for their products. With a frequent visit to the store or real-time access to the retailer’s inventory levels, you get to know which products are selling fast and which are not. This, as a result, helps you avoid a sudden surge in the sale as per the demand scenarios.
- Better space utilization in the supplier’s warehouse
With knowing the demand for a particular product, suppliers can produce or fill in space with fast-selling products, which in turn, helps avoid dead stocks, reduce production charges, and control inventory with more flexibility.
- Cost-cutting with space management
Suppliers can push inventory to the customer’s location which they can store for months at zero cost. Since customers always have a steady flow of supplies, they would rarely be in any stock-out situation.
Disadvantages of Vendor Managed Inventory
– The retail stores here need to have a deep trust in the supplier/vendor since they share a part of their business responsibilities with them.
– If the vendor is not able to fulfill customers’ demand or handle the responsibility, it would be a loss on customers' end facing frequent stock-out situations.
To make the most out of your VMI model and overcome the above disadvantages, vendors and retailers can implement the below-mentioned tricks. These can help them avoid mistakes and make their VMI model a success.
What are the Types of Vendor Managed Inventory?
Given that the onus is on the vendor to manage and replenish inventor, VMI optimizes product availability while cutting down inventory costs. Some examples of vendor managed inventory include
- The vendor inspecting inventory levels to decide how much more to order while the buyer bears the procurement cost and assumes ownership.
- The vendor owns the inventory and takes decisions on placing orders, while the customer assumes inventory ownership.
- The vendor's inventory is on the customer's side and is periodically review to determine the latest date by which the next round of restocking is to be done.
- The vendor subcontracts and outsources inventory management to a 3P while also holding inventory at a 3P warehouse from where it is shipped and restocked.
Best Practices to make VMI Setup More Effective
Despite it being a popular and effective model, you can make the most out of the VMI model by implementing some helpful practices that will help your business in the long run. Let's take a look at some of them.
Set Short Term and Long term Goals / Expectations
Both the parties (retailers and vendors) should communicate their goals and objectives clearly with the other party to ensure the successful implementation of the program.
If the supplier and customer agree on updating their stock details to each other on time, then there would always be a strong business flow between the two parties. The suppliers need to have access to retailers’ sales and inventory information to ensure the timely fulfillment of customer orders.
Effective Communication Between Two Parties
Effective communication and information sharing are necessary to work on the goals set by suppliers and customers. They will need to look after every failed goal and understand the problems to avoid repeating them in the future.
Common Mistakes made in VMI
– Sometimes the customer (retailer) applies for new deals /promotions in the shop and the supplier finds a sudden spike in demand. This, as a result, can be a problem on the supplier’s side to manage shipments.
– When the supplier does not inform all the customers (retailers) when there is a high product demand from one customer’s end. Here, the suppliers need to maintain flexibility between their customers in order to adjust demands in a more flexible way.
These mistakes and many others can be avoided with a proper communication channel and information transparency in place.
STMicroelectronics N.V. and Hewlett Packard (HP) started using their well-planned VMI system in 2001. ST’s supply chain concept owner, Gilles Sanchez, said that the company has “cut product lead time in half, reduced buffer inventory from five to two weeks, and eliminated 80% of manual transactions”. The returns were remarkable, however, HP and ST worked together for two years to make this a successful system. And, it happened because of their ability to connect their incumbent IT infrastructures and build off of the existing platform.
Well now that you understand what exactly Vendor Managed Inventory is and its perks, let us understand how to implement this model.
How to start with the Vendor Managed Inventory Model
In the below diagram, you will see, the vendor produces the products and distributes them among the retailers equally. Once the sale is made, he compares the demand for products in each retail store. The vendor notices that Product A and B made a better sale as compared to C. Based on this, the vendor forecasts inventory and gets the count for the next production and distribution among the retailers.
The above example is based on small-scale production data. Imagine distributing 100 product categories of a larger quantity that are distributed among 50 retailers and manually comparing and managing excel sheets for each. Quite time-consuming isn’t it?
To make this process simpler, there is a vendor-managed inventory feature offered to companies delivering products and introducing growth strategies for retailing/manufacturing/e-commerce businesses.
EasyEcom provides an omnichannel workflow experience for brands involved in manufacturing / retailing / eCommerce business across the globe.
A few of the key features involve,
- Inventory Management for major marketplaces (Amazon/eBay/Etsy/Walmart)
- Warehouse Management
- Retail POS
- B2B eCommerce
- Payment Reconciliation
- Consignment Inventory and more!
Let’s take a look at the features that the EasyEcom system has for you to implement the VMI model successfully.
- Vendor Master section: This helps retailers easily manage all their vendor accounts and their activities from a single dashboard.
- Customer Master: Here, the vendors can manage all their customer accounts, add new orders and manage returns.
- Product Master: Helps vendors and retailers manage their product catalog from a unified dashboard.
- Inventory Forecasting: The inventory forecasting feature will show you the sold inventory and available inventory count, based on which, it recommends the order quantity for each product.
Planning for a VMI relationship involves both sides working together. Information sharing is key to a good VMI flow. The retailers here don’t have to share every detail of their inventory. However, the supplier should be aware of any seasonal or promotional changes made in the store.
Are you looking for an omnichannel inventory management solution with integrated B2B order management for your eCommerce business? Drop us a line at firstname.lastname@example.org or directly sign up for a demo here.