Vendor Managed Inventory (VMI) is an inventory management practice in which a supplier of goods, usually the manufacturer, is responsible for optimising the inventory held by a distributor/retailer.
In traditional inventory management, a retailer makes its own decisions regarding the order size and frequency, while in VMI the retailer share their inventory data with the supplier such that the supplier is the decision-maker who determines the order size and frequency.
In VMI practice, inventory location
depends on the arrangement between the vendor and the customer. The first
option is for the inventory to be located both at the customer's and the
supplier's premises. For the supplier, this serves as a safeguard against short
delivery cycles or synchronised production cycles.
Another option can be for the supplier
to deliver to the retailer’s central warehouse or alternatively, to a third
party's warehouse. Managing the inventory at the central warehouse enables
better optimisation of deliveries and lower costs.
Finally, a third option would be for
the inventory to be located directly at the retailer’s premises such as the shop
floor itself.
From an inventory ownership point of
view, in vendor managed inventory, there are several solutions in terms of
payment and transfer of ownership.
In the first alternative, the
supplier is the owner of inventory at the premises of retailer. Invoice is
issued when the items are sold from the stock.
In the second alternative, retailer
assumes ownership of the inventory receiving an invoice upon delivery. However,
the supplier is not paid until the retailer sells the items from.
In the third alternative, retailer
owns the inventory upon delivery, while the supplier invoices the retailer once
the shipment has been made.
In the majority of the
cases, the products will be in the possession of the retailer but will not be
owned by them until the sale takes place, meaning that the retailer simply
houses the product. This is referred to as consignment stock.
There a many advantage for both supplier and retailer of using VMI:
Retailers benefit from reduced risk of going out of stock since the supplier can have information about how the products are selling.
Retailers also benefit from reduced carrying costs since they shouldn’t need to carry as much excess stock.
Supplier benefit from more control and more customer contact.
Suppliers get to gather information as to the demand for the products, this should also help reduce the amount of safety stock that suppliers need in their warehouse.
This practice can prevent the bullwhip effect since the supplier will have control over the end to end inventory.
