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Analyzing the Different Types of Vendor Managed Inventory

Posted: November 14, 2019 by Ly Phan

Analyzing the Different Types of Vendor Managed Inventory

With retailers facing increasingly competitive markets, the role of the supply chain takes on extra importance. The tight profit margins mean businesses continually need to find ways to cut costs and improve efficiency. Focusing on optimizing the supply chain is one route to boosting those margins by up to 35%. In this post, analyzing the different types of vendor managed inventory (VMI) systems, we will look into how retail stores can capitalize on the experience and know-how of warehouses.

 

What Is VMI?

Vendor managed inventory is a term that describes the process where the inventory responsibility lies with the vendor (or supplier) in the supply chain. In short, it means that the suppliers control the replenishment of stock for retailers. A real-life example of this could be in the grocery sector, where a manager decides the type of fruit or the level of stock a restaurant or store will receive. 

vendor managed inventory can be used for supermarkets and stores

 

Benefits of VMI

The key advantage of vendor managed inventory is the opportunity to leave inventory management to the experts. Warehouses and distribution centers around the world prove their value in the control and movement of stock to retail stores. The benefits of allowing suppliers to retain greater inventory control can be seen throughout the supply chain:

  1. Fewer resources dedicated to inventory: If you have limited storage or staff, then letting suppliers handle inventory is one way to avoid extra spending. Managing inventory takes up resources which responsible warehouses and distribution centers will have.  
  2. Reduced costs: As well as resources, the financial burden of handling inventory can be reduced.
  3. Organized systems: Due to the expertise of warehouses, they are likely to have efficient inventory control systems in place. This leads to more streamlined operations with warehouse management software automating the replenishment process. The software can also accurately forecast customer behavior and seasonal peaks, adjusting stock levels accordingly.  
  4. Reduced stockouts and errors: The cost of stockouts reached $1 trillion in 2018 and can have a detrimental impact on the reputation of businesses. Due to the power of software, stock levels can automatically be replenished from suppliers ahead of time. The ease of data integration and synching can also lead to a reduction of human error by allowing information to be updated across multiple platforms, automatically and in real-time.
  5. Time to focus on sales: Instead of dedicating precious resources to inventory management, retailers can use the opportunity to focus on sales. By utilizing the power of software, workers can optimize the product mix and pick the best selling stock, thereby increasing profit margins.  
  6. Smooth supply chain: Following a VMI model presents an opportunity for a secure and synergized partnership between the supplier and its customers. As a result, the whole supply chain would benefit from the mutual understanding and trust between partners.
  7. Improved service for the end customer: The ultimate goal of any supply chain is to deliver the goods to the end customer in a timely and professional manner. Each of these benefits leads to an improved service with retailers having the right products, at the right place, at the right time.

By letting the suppliers retain control over inventory management, retailers can still reap the benefits of cloud-based software to integrate with trading partners. The synergy will lead to more automated, efficient processes. 

For example, the retailer can set up automated alerts to its suppliers when a particular stock runs low. This message is then automatically sent to the supplier, who will then deliver the necessary products with minimal human input. 

It’s also important to understand there are different types of vendor inventory management programs. The challenge is to find the right option for your business.

 

Types of VMI

vendor managed inventory is crucial for retailer

The concept of “vendor managed inventory” covers a broad range of tasks involving the management of inventory. They can vary according to the specific needs of individual businesses and supply chains. One vendor managed inventory model could focus on just one product, while another may take control of a retailer’s entire inventory. Here are five top examples:

  1. Supplier-led physical checks: This can often be seen at small businesses, like local convenience and hardware stores. The supplier can show up at a store, reviews inventory levels, and replenishes on the spot. Another example of this can be seen in vending machines. Additionally, the delivery of stock could be made at a later date, organized by the supplier. While such a method is feasible for smaller stores, it can quickly become ineffective as the business grows.
  2. Customer orders inventory: The customer can order inventory on a periodic basis (daily, weekly, etc.), and the supplier delivers the products when required.
  3. Synergized inventory systems: For small-to-medium businesses, this can be the most efficient option. The supplier and customer integrate their inventory management software to automate the replenishment process. Vital information like stock levels, production schedules, and forecasts can be shared in real-time, with partners making decisions accordingly.
  4. On-site inventory planner: The supplier can provide an on-site inventory planner who works on the customer’s location, managing the inventory processes. This can be beneficial for growing businesses with a wide range of products such as supermarkets and department stores.
  5. Dedicated space for suppliers: For businesses that have warehouses, leasing space to vendors to manage the inventory operation is another option. In doing so, the company can allocate resources and increase productivity.

There are a variety of VMI models trading partners can use to improve the efficiency of the supply chain. The five types laid out above all have their merits and weaknesses. However, it’s essential to consider the ambitions of your business. 

For instance, as a small business, making the leap to invest in affordable, cloud-based inventory management software gives you the ability to automate processes with your suppliers. In doing so, you can reduce your running costs, allow the experts to take over inventory control, and ensure a smooth supply chain.

 

VMI - Not Just for Walmart

There’s a common misconception that the VMI model only works for large companies and corporations like Walmart. As we’ve seen, this is simply not the case, and allowing suppliers to take control of your inventory can prove to be a catalyst for growth. The power of partnerships, with responsive and flexible supply chains, can be the difference that leads businesses to success.

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