VMI: What Is Vendor Managed Inventory? Examples and Solutions
Vendor managed inventory (VMI) is a physical products business model where suppliers take responsibility for managing their customers’ (buyers’) inventory levels. This system involves the supplier having access to their customers’ physical inventory, which enables them to monitor and replenish stock levels when necessary.
The primary goal of VMI is to eliminate the need for the buyer to monitor and replenish their inventories. Suppliers provide VMI as a value-added service to the buyers, typically to maintain expense items or “C” class items that are a nuisance for a buyer to maintain. This strategy leads to lower inventory carrying costs and less shrinkage while increasing your fill rate and rate of return (ROR).
Curious about implementing VMI in your business? It may appear complicated at first glance, but with a full understanding of modern strategies and tools, you can leverage it relatively quickly. Continue reading to learn the essentials of VMI, a few examples, and the steps needed to begin VMI.
Table of Contents
- What Is Vendor Managed Inventory?
- Vendor Managed Inventory Example
- Vendor Managed Inventory System
- Vendor Managed Inventory Benefits
- Vendor Managed Inventory Software
- Vendor Managed Inventory Agreement
- Implementing VMI in Your Company
- Frequently Asked Questions
What Is Vendor Managed Inventory?
Vendor managed inventory is a supply chain management model that allows suppliers or vendors to monitor and manage their customers’ inventory levels. In this system, the supplier is 100% responsible for meeting the demands of their customers’ inventory replenishment.
Suppliers accomplish VMI by either:
- In-person inventory tracking: suppliers visit their customers’ inventory stocking locations to do cycle counts or create orders using a mobile scanning app
- Remote inventory tracking with IoT devices: suppliers provide IoT technologies, like weight scales or sensors, to monitor stock levels automatically or “hands free” and determine when restocking is necessary based on min/max levels.
VMI is a mutually beneficial system that helps both suppliers and buyers by optimizing inventory levels, reducing unnecessary expenses, mitigating or eliminating lead time, and streamlining profitability.
Vendor Managed Inventory Example
The simplest example of VMI is the industrial distribution industry. Major industrial suppliers such as Graybar and Gexpro Services use VMI to ensure that they replenish customer stockrooms in an optimized way where the customer doesn’t carry too much inventory but also doesn’t stockout.
The supplier sends technician drivers to customer stockrooms to monitor the bins of inventory and do orders or cycle counts to determine replenishment levels. Surprisingly, many suppliers still use clipboards and spreadsheets for tallying replenishment needs. Fortunately, there are now mobile apps that can greatly increase the efficiency of VMI replenishment by helping users scan QR codes of inventory bins and input orders or cycle count quantities. Then the apps send the information digitally to the supplier for fulfillment. The driver then brings the parts back to the customer on his next trip.
Suppliers are responsible for keeping the right amount of inventory on hand to meet customer demand, but not too much so that customers don’t accuse the suppliers of “bin stuffing”. This system allows buyers to reduce labor costs associated with counting inventory, while ensuring that their shelves are always stocked with the correct items.
Vendor Managed Inventory System
The VMI system involves a close relationship between a supplier and their buyer. The system begins with the supplier having access to the customer's inventory, which allows them to determine when replenishment is necessary.
The supplier is responsible for ensuring that the customer has the required inventory level to meet their demand. The supplier then ships or hand-delivers the products to the customer as per the schedule in their written agreement.
This system is beneficial for both the supplier and the customer. For the supplier, it reduces the risk of stockouts and helps them optimize their inventory levels. For the buyer, it simplifies or eliminates the need to pay for the labor required for manual inventory management and ensures they always have the required inventory level to meet their demand.
Vendor Managed Inventory Benefits
There are several benefits to implementing VMI:
- VMI streamlines most aspects of inventory management for the buyer, which saves time, reduces costs, and improves their customer satisfaction. The supplier takes near-total or total responsibility for managing the inventory levels, which allows the buyer to focus on their core business activities.
- VMI replenishment apps can track usage and optimize inventory levels, which reduces the risk of stockouts and overstocking. This, in turn, reduces carrying costs and increases efficiency.
- VMI maximizes visibility into inventory at the point-of-use (in stockrooms or on manufacturing lines), which enables both the supplier and the buyer to make better-informed decisions. This leads to bigger profits for both parties in the long term.
Vendor Managed Inventory Software
VMI software is one crucial component of any VMI system. This software enables suppliers to monitor each of their buyers’ inventory levels on a weekly or bi-weekly basis, set min/max levels, track usage, optimize inventory levels, and make accurate replenishment decisions accordingly. The software also allows suppliers to track their performance metrics, such as inventory turnover and delivery schedules. Data that only includes order information can be “lumpy” less dependable for making decisions on what optimized min/max levels should be. Only sophisticated min/max AI analytics can turn this lumpy data into actionable recommendations on what the optimized mins and maxs should be. The software your team uses should be scalable and customizable to meet the requirements of both your goals and those of your buyers.
eTurns TrackStock software is a market-leading VMI (and CMI) solution that automates the VMI process for stockrooms and trucks. TrackStock works with a wide selection of IoT technologies you can use to track inventory usage, including: QR code scans, electronic shelf labels, SensorBins, and RFID digital kanban. eTurns TrackStock even has plans in 2024 to allow for inventory tracking with SupplyPro vending machines. Each of these methods saves time over labor-intensive manual methods of tracking inventory. TrackStock sends digital purchases orders to any supplier and optimizes your inventory levels and min/max inventory management through our Min/Max AI Analytics Dashboard.
Vendor Managed Inventory Agreement
A VMI agreement outlines all of the terms and activities that both the buyer and supplier will commit to for the duration of the agreement. An effective VMI agreement includes details such as the inventory stockrooms that the supplier will have access to, the frequency of replenishment, and the metrics that will be used to measure performance.
VMI agreements may last anywhere from six months to one year or longer, depending on the level of trust and congruence between both parties’ goals. Many strong supplier-buyer partnerships extend their agreements based on positive results.
Implementing VMI in Your Company
Using VMI in your company requires a large amount of diligent planning. We’ve outlined the nine steps any supplier or buyer can follow to begin a profitable, smooth VMI experience here:
- Identify your priorities and make an item list. Your first task is identifying priorities as well as the items in your inventory suitable for VMI. It also means working closely with the supplier who will “rationalize” your current supplier list and item list by analyzing historical data, sales forecasts, and buyer demand patterns so you don’t overwhelm your team after implementation. Are you implementing VMI to reduce expenses and increase revenue in your own business? Do you love working with a select few suppliers and want to strengthen your relationships with them? Whatever it may be, write down your most important goal. This will guide your decision-making process with everything else.
- Conduct SKU rationalization. With your item list complete, listen to how your potential supplier reviews and rationalizes your existing stock-keeping units (SKUs). SKU rationalization is the process of finding similar or duplicate items and consolidating them into a single SKU.
- Determine minimum inventory levels. Set realistic minimum levels for your VMI system to ensure its success after launch. Levels should be based on all relevant parameters, such as lead time, customer demand variability, and desired service levels. The most effective point-of-use inventory management apps will provide min / max tuning dashboard analytics to determine, based on usage, exactly what the min/max levels should be to optimize inventory levels and maximize service levels.
- Communicate your goals and sign the agreement. You can already see how VMI will benefit your business, but effective negotiation requires valuing the other party’s needs. Once you set up a call with their team, thank them for making time to discuss your VMI initiative and ask what they’re working towards. Chances are you’ll find at least a few similar areas and can finalize an agreement once both parties are satisfied.
- Organize your item list data and tools to feed your supplier’s analytics. VMI is simplest when you start with inventory item list data that is as organized as possible. If you haven’t already conducted an ABC analysis for cycle counts, now is the time. If VMI implementation requires new software tools, figure out what you need and whether you or the supplier will pay for it. If the buyer pays for the VMI software then it can be used to do cycle counts, to track usage, or to order inventory from any supplier with digitized POs.
- Request historical data. It’s difficult to make informed decisions about inventory replenishment if you don’t have a clear picture of your historical sales data. If you have a summer boom or a winter lull, your own staff needs to be prepared for that.
- Set a launch date. Nothing gets done without a deadline, including VMI. When all parties are on board, you have the data you need, and processes are ready to go, schedule your launch date. This is when your new VMI system is fully operational and you feel comfortable your supplier will fulfill your inventory needs.
- Develop relevant targets. The new process is going to come with questions, occasional confusion, and slight hiccups. Know that this is normal while still prioritizing solutions. Keep an open line of communication between your team and your supplier’s teams to ensure ordering targets are met.
- Master the essentials and engage in continuous improvement. Take notes on both what’s working and what needs to be improved. Once the inventory levels are optimized using real usage data from your software, suppliers should be able to keep it optimized. VMI is capable of producing short-term results in labor savings, but most benefits will be realized after at least one to two business quarters of optimizing your inventory levels with VMI software. Observe the progress you’re making in decreased inventory levels and carrying costs so you can quantify your savings and feel rewarded for your efforts.
Frequently Asked Questions About VMI
You now have the essentials of VMI and know its basic functions within most business applications. Perhaps you’re wondering more about your specific industry and the benefits you can anticipate as soon as you implement it.
We did the heavy lifting by looking for the most commonly asked questions about VMI and providing our answers below.
What Is the Purpose of VMI?
The purpose of VMI is to reduce as many inventory-related expenses as possible for both suppliers and buyers. Inventory is expensive to ship, unpack, store, monitor, and replenish so businesses are happy to lower expenses wherever they can. VMI automates some aspects of inventory management and eliminates others, producing a streamlined way to meet the needs of both parties.
Who Uses Vendor Managed Inventory?
Both suppliers and buyers utilize VMI to reduce recurring costs and simplify their operations. As far as industries that utilize VMI, they include the following:
- Consumer goods / consumer packaged goods
Who Benefits from Vendor Managed Inventory?
All parties throughout a given supply chain benefit from vendor managed inventory. When a supplier has data directly from their buyers, they can rapidly predict the right amount of raw materials to order, what timelines to operate on, and whether to increase or decrease production. Without VMI, suppliers may carry more safety stock than they need, and buyers may order more than is available from their supplier.
With VMI and optimization analytics, suppliers optimize their ordering timelines from their raw material providers, and buyers don’t have to worry about under- or over-ordering. End customers benefit too, because the retail environment has the products they need, when they need them.
The Bottom Line
The team at eTurns can help you to implement a VMI system that is tailored to your specific needs. Try our software free for 30 days and overhaul your inventory operations with remarkable simplicity. Got questions? Contact our team now and we’ll be happy to help.