Inventory management is essential to improving any supplier or retailer’s profit margins. And vendor managed inventory can help suppliers and buyers mutually reap the benefits of successful inventory optimization. So what is vendor managed inventory?

Get our Inventory Management Software Requirements Template

What Is Vendor Managed Inventory?

Vendor managed inventory is a collection of processes and inventory management software wherein a manufacturer, who’s also a supplier, takes up the responsibility of optimizing the distributor’s inventory stocks.

It’s a B2B strategy that enhances the supplier-distributor relationship and collaboration, helping both parties align their objectives for optimized operations.

In a traditional business model, product buyers are responsible for deciding inventory volume and when to place orders. A vendor managed inventory model shifts this responsibility from the buyer to the supplier.

In some cases, third-party logistic vendors may also be responsible for maintaining adequate inventory levels on the buyer’s end.

To help you understand how vendor managed inventory can fit into your operations, we’ll explore its benefits and drawbacks, look at situations where this method works best for businesses, and discuss what you need to do to get started with this type of system.

Vendor Managed Inventory Software System

Vendor managed inventory systems, also known as supplier-assisted inventory replenishment or continuous replenishment programs, help you fulfill orders and streamline your overall inventory management process.

In this type of system, both parties share data to help achieve better order accuracy. However, vendors are entitled to inform and educate employees and associates about their inventory and its use.

Compare Top Inventory Management Software Leaders

Key Features

Selecting software with the best suitable features can be overwhelming for a business. This can be even more daunting when this is the first time you’ve used a particular solution.

To ease the process, we’ve curated a list of standard features for a VMI solution. Other than these, you can look for additional capabilities that precisely match the requirements of your business.

Demand Forecasting

Forecasting the right demand for goods is one of the imperative capabilities that VMI solutions offer. They help forecast demand for efficient product manufacturing, assembly and shipping.

It coordinates the data of individual units from various businesses that make up your customer base and facilitates supply chain planning backed by insights. The software also helps you identify non-performing stock-keeping units and avoid overstocking goods in your warehouse or retail outlet.

Inventory Management

You can effectively track information for the products your business stores, purchases, manufactures or sells. The software also facilitates accurate pricing and helps maintain optimum stock levels. A good vendor managed inventory system should include serial and lot tracking capabilities.

Data Exchange

VMI solutions support easy data and document exchange from one device to another within a company or between clients, customers and business partners. This may include custom and tax information, inventory documents, purchase orders and receipts, shipping and order status, and more.

E-commerce Integration

You can select a VMI solution that integrates with major web stores, shopping carts and eCommerce platforms. This will help streamline inventory levels, payment options, including cash and digital, and shipping modes and options.

Businesses can use these solutions to manage all products sold via a designated eCommerce store using warehouse management software or any stock control solution.

Get our Inventory Management Software Requirements Template

Primary Benefits

Investing in a vendor managed inventory solution can be a win-win for both vendors and buyers. From reduced carrying costs to streamlined execution and efficient supply chain management, VMIs help customers collaborate and maintain strategic relationships with vendors.

Let’s look at its various advantages for both suppliers and buyers:

Suppliers

The strategic initiative of implementing vendor managed inventory for suppliers offers multiple advantages. Let’s dive in:

Reduce Carrying Costs

Organizations can reduce unnecessary costs by eliminating the need to pile up overstocked items. Additionally, vendor managed inventory software mitigates the massive cost of accruing unsold inventory. It enables customers to place bulk orders with their vendors, which can secure better volume discounts.

Improve Demand Forecasting

With accurate demand forecasting and access to consumers’ POS data, suppliers can now predict inventory needs based on complete visibility in stock levels and sales patterns.

Strengthen Customer Collaboration

Stronger customer relationships give suppliers a competitive advantage since they can better support on-time deliveries and offer superior customer service. Vendors can offer loyalty programs or bulk discounts to further entice customers.

Enhance Sales

Over time, as the vendor can understand and predict customer demand through VMI, partnerships can improve between both parties. Product availability further boosts customer service quality and creates improved brand loyalty. This results in more returning buyers and even better sales in the future.

Buyers

Let’s dive into the different advantages that vendor managed inventory offers for buyers:

Reduce Safety Stock

As the vendor has more control over inventory planning and stock management they help mitigate oversupply based on demand forecasting. Thus, eliminating the need for carrying safety stocks and the risks associated with it.

Lower Inventory Levels

With the suppliers being in charge of inventory, the chances of inventory-related issues are minimal. How’s it achieved? By maintaining low inventory levels and conducting frequent shipments to reduce stockouts, overstocking or stock expiration.

Minimize Overhead and Risks

Buyers can potentially reduce inventory and storage space since excess stock carrying is reduced. This means lower overhead costs on facilities and warehouses.
Additionally, lower upfront expenses helps buyers minimize the risks associated with fluctuating demand since they don’t have to worry as much about excess stock piling up.

Lessen Inventory Shrinkage

Damaged goods, shoplifting or expired products — these are all terms associated with shrinkage, and writing these off are part of owning inventory. How do you minimize it? By maintaining limited stock on hand.

Compare Top Inventory Management Software Leaders

Limitations

So far, vendor managed inventory may look like an all-sunshine-and-no-rain business model. However, in reality, it does have a few drawbacks. Generally, no inventory management model is perfect.

Each has its advantages and disadvantages that may vary depending on the size, type and complexity of the business model it serves. Here are some of the most significant obstacles or drawbacks that vendors commonly face:

Poor Supplier Delivery

When a business chooses to adopt VMI, the responsibility to deliver inventory on time and at adequate levels resides on the vendor’s shoulders.

It’s possible that a supplier may not have enough expertise, proper infrastructure or the right software to provide dependable service. These issues can result in a complete supply chain breakdown.

Unscrupulous Partners

An unscrupulous vendor may take advantage of the method by sending excessive inventory for their benefit. For instance, a supplier may ship too much stock at the end of a year to boost sales figures in their financial statements.

Although there may be a return policy, the customer must invest unnecessary effort, time and attention to see the process through.

Sensitive information shared with the vendor to help make VMI a success also leaves customers in a difficult position if the business relationship fails.

Loss of Control

Investing in a vendor managed inventory system entails giving up control of inventory and completely relying on the vendor. Certain businesses may find it difficult to relinquish control and hand over data to a third party.

Volatile Markets

Customer preference is a highly volatile factor that could make or break your business. Vendor managed inventory contracts should adequately take care of changes in customer preference or you may end up sitting on stock no one wants.

This way, businesses won’t be stuck with stocks of inventory that customers don’t want. Instead, the vendor should adjust and replace inventory according to customer taste and preference.

Examples

While talking about the companies and businesses using vendor managed inventory systems, a popular name that always pops up is Walmart. The brand has a VMI system, so its suppliers or vendors are held responsible and accountable for taking care of their inventory at Walmart’s designated warehouses.

Their centralized databases are updated at all times so that manufacturers can have a look at inventory levels and tell when they’re getting low. This way, they can know the best time to send more stock to Walmart’s retail stores.

The solution not only replenishes their stock levels at the right time and in the correct amounts but also removes the manual process of managing inventory from Walmart.

Shifting to the online eCommerce marketplace, Amazon is another excellent vendor managed inventory example. Recent statistics on Amazon’s third-party seller share reveal that third-party sellers make up more than 58% of the products on Amazon’s website.

VMI allows third-party vendors and suppliers to ensure an appropriate stock level in Amazon’s warehouse. Its strategy allows Amazon to focus on other areas such as shipping, payment processing, returns and more. This way, the inventory management strategy benefits both parties.

Get our Inventory Management Software Requirements Template

When Does VMI Work Best?

Generally, there need to be numerous use cases and functional scenarios for a strategy to perform successfully. VMI platforms work best when the inventory supply has a warehouse or manufacturing facility close to the buyer.

This is one of the many reasons manufacturing suppliers’ locations are in geographical areas with large customer bases. For instance, an aircraft manufacturer may be in close geographical proximity with inventory suppliers, like a manufacturer of metal sheets, tires or brackets.

Companies that opt for this inventory management approach should be capable enough to analyze their inventory requirements in depth before authorizing a vendor. The buyer needs to complete a thorough analysis so that both parties can sync inventory levels.

Additionally, this helps users understand how much stock needs to be stored and made accessible to the inventory supplier’s warehouse so that they can fulfill the demand effectively.

Small companies with simple supply chains may have simple inventory requirements that only fluctuate on a familiar demand timetable. On the other hand, mid-size and large-scale companies with a complex supply chain may need a vendor management inventory or ERP software to help handle their processes.

Setting up New Schedules

For a business to establish vendor managed inventory, the customer and vendor must take care of several prerequisites. Although these variables may differ depending on the type, size and industry involved, transaction cost, stock percentage levels and replenishment frequency are other factors that most businesses keep track of.

Choosing software that enhances transparency between the vendor and customer is crucial. Most customers are only satisfied with giving control over inventory management to their vendors when there’s ample visibility into their processes.

While implementing vendor management inventory software, it’s essential to ensure that both parties have explicitly clarified their expectations of one another and are on the same page regarding information sharing.

To ensure effective implementation, adopting a system that meets your unique requirements is a good idea. Our free inventory management requirements template can help you get started.

Successful software should include features like alerts, notifications and reminders. It should also do much more to simplify the whole process and make it more convenient for both parties, thus boosting team efficiency and preparedness.

Get our Inventory Management Software Requirements Template

Next Steps

We hope this article has given you a clear picture of vendor managed inventory and how it can fit into your business, enabling you to decide whether it would be a valuable practice for your purposes.

Be wary of the drawbacks or hindrances associated with this inventory management model, and carefully consider how to set up and manage VMI at your company.

Now that you know all the benefits vendor managed inventory offers, you can take the next step and look for software that suits your chosen requirements.

To simplify the process, starting with a list of products that match requirements essential to your business operations is best. You can use our free comparison report to jumpstart your selection.

What else do you think is important to know about vendor managed inventory? Let us know with a comment below!