For businesses that have large amounts of inventory, a Vendor-Managed Inventory (VMI) model might be the answer. Not only does it potentially improve customer service and retention, but it may reduce demand uncertainty, inventory requirements, and costs.
When exploring a VMI model, you should perform a full SWOT analysis and prepare a business case to be aware of all of the benefits and risks, not just the costs. The supplier or vendor that provides the inventory will keep track of all inventory levels and replenish stock through an electronic data interchange (EDI), or when they come to the location(s) and take physical inventory. Businesses that do well with VMI models include grocery stores and hardware stores that carry hundreds of small parts.
Pros of using a VMI model
When businesses use a vendor-managed inventory model, some of the advantages include:
- An efficient inventory system: Inventory can be hard to keep track of, especially with returns, lost or damaged parts, pilferage, and shipment delays. Because the vendor is managing inventory levels and may work from an estimate of usage, they can help minimize employee miscounts or delays in taking inventory, and reduce the internal staff needed to keep track of inventory.
- Anticipate customer demand and reduce inventory costs: Some businesses may use inferior software solutions to manage inventory and forecast recommended replenishment numbers. When you combine VMI models with advanced supply chain software, or supply chain planning software that includes advanced-analytic modeling and simulations, you get a better prediction of customer demand, which improves inventory efficiencies. These solutions offer better visibility into inventory and future demand, allowing businesses to improve their inventory investment.
- Reduce stock-out losses and per-unit freight costs: When items are out-of-stock, customers look elsewhere. Businesses must balance carrying adequate inventory and reducing excess supply and wasted capital. VMI models don’t focus on per-unit freight costs for incoming parts or products, as they have general large economies of scale with incoming shipments.
- Manage complex inventory levels: For businesses that sell hundreds of small parts, a VMI model can be beneficial and practical. As vendors know their inventory and specialize in their products, there’s less hassle with inventory counts, which can be time-consuming.
Cons of using a VMI model
Following are some downsides and inefficiencies that can occur when using a VMI system that you should be aware of:
- Vendors can make mistakes: Vendors generally work with RFID scanners and barcodes, or they have running tabs on spreadsheets in which they tally the inventory used in a week or month. They then work from that data to replenish supply. However, not all vendors are exceptional at using advanced supply chain planning solutions as part of their VMI model.
- Not all vendors can anticipate demand 100%: While vendors might be able to handle inventory counts, they may not be able to anticipate fluctuating customer demand. That’s where leading demand planning or demand forecasting software can help ensure accurate forecasting and reporting, which eliminates human error.
- Vendors may not have necessary fill-rate requirements: Businesses must set minimum and maximum inventory levels, but ensure they’re not too restrictive to help vendors have adequate supply to meet demand. While inventory counts may come through MRP or ERP systems, the business must determine replenishment limits through Inventory Optimization software.
Ultimately, a VMI model can be beneficial to businesses that have trouble keeping track of inventory. Incorporating a VMI model with supply chain planning software helps you:
- Anticipate demand with more accuracy.
- Reduce overages.
- Minimize stock outs, which can result in lost sales.
Vanguard IBP is the leading Integrated Business Planning platform, leveraging predictive analytics, artificial intelligence, and advanced automation.