The Potential and the Pitfalls of Vendor Managed Inventory (VMI)

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How to realize the many benefits of VMI without risking your reputation.

Inventory is everything to a business, but managing your inventory is one of the most challenging aspects of supply chain operations. Excess inventory takes up space in your warehouse and ties up funds that you could be using to improve other areas of your business. Conversely, not having enough inventory can result in production shutdowns, missed sales, order delays, and upset customers.

You’ve got to get it right.

The ideal balance is to hold only enough inventory to sustain production, to buy only what the customer will use, and to keep costs low. However, a constantly changing production schedule doesn’t make this balance easy to obtain.

What Is Vendor Managed Inventory?

Vendor Managed Inventory (VMI) is a supply chain system that replaces your inventory for you, without having to manually initiate the purchasing order. Essentially, VMI is a partner that maintains your inventory in the most efficient and cost-effective way.

Leading companies use VMI to manage their inventory. What is it, and what can it do for your business? Zac Chamberlain of @GLHuyett explains... Share on X

Vendor Managed Inventory isn’t a new concept. In fact, VMI has been an integral part of the supply chain for generations, though it started on a much smaller scale. Today, some of the largest companies, from Walmart to Bosch, use VMI to handle aspects of their supply chain. One of the most common ways VMI is used is alongside original equipement manufacturers (OEM) for class C items such as fasteners, hardware, and other low-cost items.

While VMI solves many supply chain headaches, it’s not without its risks. Let’s look at some of those.

Disadvantages of Vendor Managed Inventory

In addition to the common challenges of demand changes or inaccurate forecasting, there are various other issues that will help you determine if VMI is a viable option for your business.

Four risk factors in using VMI that you should be aware of: 1) Suppliers that are not equipped or experienced enough to deliver to your standards... @GLHuyett Share on X

When A Supplier Can’t Deliver

When a vendor is too small or doesn’t have the processes or expertise to handle your orders, it can place undue stress on your business. The same can be said for shipments that are repeatedly late, contain mistakes, or aren’t the quality you expect.

When choosing a vendor to manage your inventory, you want to ensure that they can handle your task with all the efficiency that a VMI system is intended to provide.

Being Stuck with A VMI Supplier You Don’t Want

VMI systems are like a partner, and because they are so integrated into your business, it can be hard to get rid of them when you aren’t satisfied. A change in suppliers can throw the entire supply chain off-balance. This makes it doubly critical that you vet and choose your VMI partner carefully.

Market Trends and Unexpected Changes

While marketers do their best to predict and even create trends and needs, customer preferences aren’t always predictable and sales can vary from forecasts despite careful research, promotions and planning. When the market changes rapidly, it’s a challenge to have the inventory when you need it. This can be worsened when your vendor can’t meet your immediate demands due to their other obligations, system limitations, or due to contract terms.

Vulnerability

Increased vulnerability from data exposure to a third party is possibly the most serious concern many have about VMI. When working with a VMI, you depend on them to uphold the most important aspect of your business, supplying product for your customers. This means you have to have transparency with your supply chain, processes, and forecasting.

It does allow the possibility that they could take advantage of this confidential information, and even share it with other parties. However, this is rare, but it does emphasize the importance of doing your due diligence and selecting a vendor that you can trust.

Many of these risks and problems can be alleviated by using a common supply chain business network for you, your VMI partners, suppliers, and logistics partners. This gives everyone real-time visibility to demand and inventory, and helps your VMI partners and suppliers gear up for peak demand periods, and scale down when things ease up.

Advantages of Vendor Managed Inventory

Despite the risks, the benefits of Vendor Managed Inventory far outweigh the potential issues, which is why it is increasingly popular.

Four ways VMI can improve business operations: 1) Improved efficiency through a shorter supply chain... @GLHuyett Share on X

Improved Efficiency

There are many ways that VMI improves efficiency:

Reduction in data errors
Shorter supply chain
Fewer stock-outs
Having the right stock at the right time
Increased forecast accuracy due to transparency of end user demand
More consistent inventory through improved communications

Cost Reduction

With VMI, your costs are greatly reduced in several areas. The single biggest cost associated with original equipment manufacturing (OEM) comes from line shutdowns due to shortages of critical parts. VMI can help prevent line shutdowns by avoiding stock-outs and preventing cash flow restrictions caused by inventory being tied up in a non-nettable location.

Additionally, by passing on the responsibility of resupplying your inventory to the vendor, you no longer have to work with several different parts manufacturers with locations that are likely spread across the globe. This reduces your time and money spent on customs, documentation, and other hassles.

Management costs are also reduced due to the smaller shipments. Smaller, more frequent shipments based on adequate forecasts mean reduced inventory, fewer stocks, and less manual overhead in terms of time spent keeping track of shipments.

Better Data

Any good VMI relies on good software to ensure accurate forecasts to fill their orders. Demand sensing, or real-time views of demand are even better. This new view of your actual demand helps to improve the overall performance of your company, from sales staff to supply chain managers, and allows you to develop a better understanding of what your customers actually want.

Greater transparency helps your VMI partner to run their operations more efficiently, which benefits you as well as your VMI partner. You learn more from your customers, and your VMI partner learns more about you. This helps them better fulfill your needs so you can deliver better service to your customers.

Reduced Complexity

Working with multiple manufacturers can add an unnecessary layer of complexity to your business. A VMI partner works in product groups to remedy the hassle caused by procuring singular parts from one supplier and the rest from several others. A VMI partner will send you everything you need, together in a single shipment, without overloading you with excess inventory.

Selecting Your VMI Partner

When selecting your VMI partner, you want to ensure that they provide enough support for your team, and that your senior management understand the benefits and accepts the shift. There also needs to be adequate training to put VMI in place effectively. Without support, acceptance, and training, it will be much more difficult to integrate a VMI system.

An experienced partner is important if your VMI system is to succeed. Vendors need to be familiar with your products, deliver orders on-time and in-full, and have the proper technology to forecast your inventory needs. It’s important to get to know their capabilities, their manufacturers, and get references from their customers.

VMI is meant to shorten your supply chain, reduce hassle, cut costs, and improve efficiency. It can do just that, if you do your due diligence, and ensure you’re working with the right partner.