A company’s inventory is the heart of its business — but if that inventory isn’t managed efficiently, the business can crumble like a sand castle. That’s why some successful companies have invested in a vendor-managed inventory (VMI) model, which is designed to control, monitor, and manage inventory from the time it reaches the shelves to the moment it’s delivered to its destination. The main difference between a VMI model and other inventory models is that the responsibility and cost of managing the inventory falls to the supplier instead of the retailer.
What is a vendor-managed inventory model?
In a VMI model, a buyer (such as a retailer) contracts the supplier (vendor) of a product to manage and control that inventory while it’s at the buyer’s warehouse or store. Corporations such as Walmart and Amazon are both prime examples of successful VMI operations that are mutually beneficial to both the vendor and the buyer/retailer.
A VMI model provides a wealth of advantages for business owners. In fact, a VMI can help companies control inventory flow, ensure product availability, monitor inventory demand, lower costs, and increase overall customer satisfaction and retention by providing the following:
- Smoother inventory flow: Thanks to constantly updated information, VMI models can create a smoother inventory flow with significantly fewer stock-outs. With these constant lines of communication, everyone in multiple departments is consistently on the same page.
- More accurate management/control of inventory: A VMI model can ensure real-time inventory management so that companies can know instantly exactly how much stock they have and when they need to reorder. Through a VMI model, a manufacturer can receive immediate inventory information the instant an online order is generated or a sale is rung up on the cash register. In addition, a VMI model enables a manufacturer to better forecast the imminent need for an item well in advance, thus providing better year-round inventory planning.
- Less overstock inventory: Retailers typically have to overstock on certain items, particularly during specific seasons or sale events. However, thanks to the real-time nature of VMI models, a retailer won’t need to stock up in order to protect inventory from getting too low.
- Reduced cost: A VMI model can help companies cut costs by eliminating the need to store overstocked items. In addition, a VMI model mitigates the high cost of unsold inventory. Even more crucially, a VMI model can reduce costs by eliminating the risk of stock shortages — shortages that might necessitate emergency expedited deliveries to clients and distributors. In addition, a VMI model enables retailers to place bulk orders, which can result in greater volume savings.
- Higher level of customer loyalty: By providing better customer service through quality inventory management, companies can expect a higher level of customer satisfaction, loyalty, and retention. Likewise, as a result of lower inventory costs, companies can provide customers with a more affordable product, while still retaining a high ROI.
Supply chain software: what you need to know
The VMI model offers many benefits to retailers. For example, Walmart’s inventory management approach is well documented. The key is information sharing. Walmart gives access to its data on current inventory levels and the rate at which goods are sold. This is imperative as now the supplier can use that data to better predict what goods are needed and where through supply chain planning software. Supply chain planning software (which includes demand planning software, demand forecasting software, and inventory optimization software) can provide a comprehensive range of inventory optimization services that cover every facet of everyday operations, such as optimized purchase schedules, raw materials for production, and warehouse optimization.
About Vanguard Software
Vanguard Software introduced its first product for decision support analysis in 1995. Today, companies across every major industry and more than 60 countries rely on the Vanguard Predictive Planning platform. Vanguard Software is based in Cary, North Carolina.