Inventory has dozens of moving parts. You have to plan how much to order, assess what’s in stock at all times, and make sure all sellable items are in good condition. But what if vendors could take some of the weight off your shoulders?
Enter vendor-managed inventory (VMI). Under this strategy, suppliers control inventory levels for their customers, who are primarily manufacturers and retailers. This is unlike the typical vendor relationship, in which companies monitor their own inventory levels and place orders from suppliers independently.
VMI helps companies carry proper inventory quantities and minimize stockouts, all while improving efficiency. Here’s how this system works and how to implement it.
What is vendor-managed inventory?
VMI is a strategic alliance in which a vendor controls another company’s inventory levels. The vendor is responsible for tracking sales or production data and deciding when to restock, meaning its customers don’t have to actively create purchase orders. Instead, they abide by a VMI agreement, which outlines the terms for things like reordering and payment schedules to keep things moving without their intervention.
A successful VMI system relies on seamless communication — often through electronic data interchange (EDI) — between both parties. The customer sends the vendor their current inventory data, including stock levels and sales records, and the vendor uses this information to plan future production, inventory levels, and more. They then manufacture or distribute the right number of items for each customer and deliver them accordingly.
Vendors usually know more about lead times, manufacturing schedules, and shipment delays than their customers, so they’re better equipped for stock replenishment planning. VMI reduces stockouts and overstocking, and it avoids the bullwhip effect: when minute changes in demand cause considerable variations in inventory levels all along the supply chain. The effect usually happens when the company ordering products overestimates demand, buys more than necessary, and causes blockages among manufacturers and vendors. A VMI supply chain prevents these issues because vendors aren’t as easily swayed by fluctuations as their customers are.
The benefits of vendor-managed inventory
Here are three key benefits of VMI for customers.
1. Lower carrying costs
If you’re a manufacturer or retailer working with vendors, VMI reduces your carrying costs. It optimizes the quantity of inventory you keep on hand, leading to less capital locked up in unsold items and a lower risk of obsolescence or dead stock.
2. Enhanced supply chain efficiency
You know your business, but vendors know inventory. When you both share data and expertise, you double the knowledge and experience needed to optimize the supply chain. Together, you better estimate demand and allocate manufacturing for prompt inventory replenishment and fewer stockouts.
3. Stronger supplier-customer relationship
VMI partnerships emphasize shared success, building closer ties between you and suppliers for a win-win every time. You depend on suppliers for ideal stock levels, and suppliers gain from a more consistent and stable business climate.
How to implement a vendor-managed inventory system: 8 best practices
VMI systems call for careful planning and cooperation. Here’s how to start that process.
1. Identify priorities and create an item list
Specify your goals for entering a VMI agreement, whether that’s lowering carrying costs or raising inventory turnover, and create a list of the goods you need. Approaching potential vendors with clear information about what you want from the engagement makes for stronger communication right off the bat and gives you both a chance to decide if the relationship is the right fit. Your business may use multiple vendors for different items, so customize VMI to the vendors and products that demand optimization.
2. Conduct SKU rationalization
Combine similar or duplicate SKUs to simplify your inventory needs — a process known as SKU rationalization. The fewer items on your inventory list, the easier it is to facilitate effective inventory control and prevent overstocking.
3. Define minimum inventory levels
Decide on the lowest number of goods you need to have in safety stock to meet demand. This is also known as your reorder point, based on variables like lead times and consumer demand fluctuation. Continue to monitor and adjust these levels over time as things change.
4. Organize inventory data and tools
You won’t be the only one using your inventory data, so organize all records as clearly as possible. Vendors shouldn’t have to chase information or sift through irrelevant documents.
Share current inventory levels, sales records, and other pertinent data. The more precise and timely the data, the better the vendor can control inventory replenishment. Just make sure data-sharing procedures incorporate confidentiality agreements and remain secure.
An inventory management solution like Fishbowl makes it much easier to track and share information. When all inventory data is already in Fishbowl’s system, you can export it in one click, generating vendor-ready reports and spreadsheets in seconds.
5. Create clear boundaries and fees
Define the VMI agreement’s costs and clear restrictions. Which items are off-limits from VMI? How much is the vendor allowed to order on their own? Specify your ideal maximum inventory levels, payment and return policies, and shipping terms. And make sure you agree on all expenses or charges in advance to prevent unanticipated costs.
6. Establish goals and metrics for success
When you set specific, measurable goals for the VMI program, you and the vendor can better work together to meet them. Choose a few main indicators to evaluate success, like inventory turnover rates, stockout frequency, or cost savings.
7. Set a launch date and monitor progress
Specify a precise beginning date for the VMI program. After launch, track important indicators and modify the system as necessary to reach objectives.
8. Maintain open communication and honesty
While it’s the vendor’s job to reorder for you, you should regularly inform them about any variations in demand, seasonality, or other elements influencing inventory levels. If real-time data sharing isn’t possible, plan periodic updates to keep the vendor in line with your organization’s requirements. Open communication avoids interruptions and ensures that the VMI program continues to operate smoothly.
Optimize your vendor-managed inventory process with Fishbowl
Fishbowl’s advanced inventory management software gives you the tools you need to monitor stock levels and share data with vendors. Its reports seamlessly break down information so you can keep everyone in the loop about everything from inventory valuation to gross sales. Plus, Fishbowl’s QuickBooks integration ensures accurate tracking, efficient ordering, and streamlined operations.
Ready to see the Fishbowl difference for yourself? Book a demo.