Vendor managed inventory, or VMI, is an inventory agreement where the buyer purchases a certain amount of product from a supplier, and keeps the inventory on-hand.
The management of the inventory and purchase orders is controlled by the vendor, refilling/restocking as necessary, whether it’s on a weekly, bi-weekly or customized schedule. Products can range from small items like o-rings and fittings, to much larger items.
So, this agreement is beneficial in a two-fold way: it ensures the vendor sells a certain amount of product, and more importantly, the buyer will always have the required amount of product on hand.
Now, this is not a new idea, but the concept of vendor managed inventory is still trying to find a foothold in industries outside of the retail marketplace. A good VMI program between a supplier and a buyer (and possibly a third party transportation company) is an excellent way to minimize the gaps between supply and demand – especially in industries that experience production peaks throughout the year.
Here are 5 things you need to know about vendor managed inventory.
End To End Customer Satisfaction Improvement
Everyone within the vast array of the supply chain is a customer to someone, right? Through the use of vendor managed inventory, each customer along the chain experiences an increase in satisfaction simply because their needs were anticipated and met. Simple.
Of course, there is work on the front end to establish the agreement, but as the life of the contract plays out, the customer experiences a greater sense of ease knowing every time they need a product, it’s there. That satisfaction (and peace of mind), once experienced through every leg of the supply chain, creates a seamless customer experience from the raw material stage all the way through to the end consumer.
One Size Fits All
Regardless of how big or small your business is, vendor managed inventory can be a great customer experience solution. Whether your organization struggles with longer lead times or inventory turnover fluctuations, a good VMI program can alleviate those issues while strengthening your strategic partnerships. This simply means that once your inventory needs have been analyzed you will be able to:
- Decrease the amount of stock you have on hand at any given time
- Increase your turnover and purchasing frequency
- Eliminate the inventory highs and lows experienced throughout the year
(This can also mean big savings for smaller companies who would normally be passed over for the steep discounts in favor of the bigger companies that buy more.)
Build Better Relationships
No business or process is perfect. When something goes wrong along the supply chain, it’s the best vendor relationships that get taken care of first. That starts with vendor managed inventory agreements.
Vendors know and understand the level of trust that goes into allowing them to manage your inventory and they don’t want to do anything to disrupt that. They will work to nurture that relationship and get your end of the supply chain back on track. (If your VMI agreement involves more than just the vendor and the buyer there are layers of strategic relationships all hinging upon a level of trust and shared risk.)
These relationships are often the bonds that allow each of the participants to stay competitive in their marketplaces and keep the supply chain running smoothly.
Operating Cost Reduction
By working with your vendor to manage your inventory, you have suddenly reduced the overhead involved in:
- managing inventory onsite
- reduced shipping costs by involving a carrier in your VMI agreement
- freed up the capital that would otherwise be tied up in housing slow moving product.
Once your cost associated with inventory management is removed, you can choose to pass those savings along to your customers. Not only will this aid in strengthening your customer relationships, but it will also go a long way in procuring new customers.
Storage, personnel expenses, and inventory maintenance make up a sizeable amount of the cost of a product. Having a VMI agreement in place helps to reduce those expenses. In fact, many vendors will even buy back any inventory that doesn’t sell as a show of good faith that they will never supply more product than you need.
No one sets out with the intention of selling their customers low-quality products. Unfortunately, quality can be the first thing that goes when manufacturers are looking to cut cost.
Having a good vendor managed inventory agreement in place can give you leverage when it comes to quality control up and down the supply chain. Your VMI agreement can provide consistency throughout each stage of the product lifecycle influencing price and quality. It is this consistency that will strengthen the relationships along the VMI chain and increase customer and vendor loyalty.
Entering into a vendor managed inventory agreement can seem particularly daunting for small to mid-sized companies, but it’s a relatively simple way to make sure your inventory is one less thing to worry about.
A VMI agreement can give you the peace of mind that comes with a JIT (just-in-time) inventory model, the cost benefit that is typically reserved for larger buyers, and the strategic partnerships that can help you ensure quality control and excellent service from end to end.