What is Vendor Managed Inventory? Definition and Best Practices for 2024

In today's retail landscape, businesses face constant challenges: technological advances, unpredictable customer demand, and supply chain disruptions. To maintain competitiveness, retailers must revamp their supply chains and enhance inventory management. This requires close collaboration among retailers, suppliers, and distributors.

Vendor Managed Inventory (VMI) emerges as a contemporary solution to inventory management challenges. 

VMI entails a partnership between a vendor and a retailer, wherein the vendor assumes responsibility for managing the retailer's inventory. In essence, VMI shifts the burden of inventory management from the retailer to the vendor.

With VMI management, the vendor monitors inventory levels and decides when more stock is needed, sparing the retailer from constantly purchasing stock. This strategy aims to cut inventory costs for both sides. 

By letting suppliers manage inventory, unnecessary stock is minimised, slashing retailer expenses. Additionally, it streamlines the vendor's operations by establishing a more predictable business flow.

In this article, we'll take a closer look at VMI, its benefits, drawbacks, and how to implement it effectively to achieve your retail planning goals. 

What Is Vendor Managed Inventory?

Vendor Managed Inventory (VMI) is an inventory management system where the vendor or supplier of the inventory takes charge of maintaining inventory, even after it's received by the retailer (that's you!). Essentially, with VMI, your supplier actively manages your inventory levels, ensuring timely replenishment to prevent stockouts.

In simpler terms, transitioning to a VMI model means entrusting your supplier with the responsibility of keeping your warehouse stocked. So, when your inventory runs low, it's your supplier's job to restock it promptly.

The VMI management model operates on a cooperative partnership basis: the vendor handles all aspects of stock replenishment, from shipping and delivery to customs clearance. Meanwhile, the retailer commits to sharing inventory and sales data, allowing the supplier to decide on order timing and quantity autonomously.

Let's break down the core responsibilities of both retailers and VMI vendors:

An 8-Step Breakdown of How VMI Works

VMI works by fostering cooperation between you and your suppliers to maintain efficient processes, optimise stock levels, and keep customers happy. 

Here's an overview of how a Vendor Managed Inventory supply chain operates:

1. Data Exchange

The process begins with the retailer and the supplier establishing a data-sharing agreement. The retailer provides real-time sales data, inventory levels, and other relevant information to the supplier.

2. Inventory Monitoring

Using the shared data, the supplier continuously monitors the retailer's inventory levels. This includes tracking sales patterns, analysing demand forecasts, and identifying potential stock shortages or excess inventory.

3. Demand Forecasting

Based on the inventory data and sales forecasts, the supplier forecasts future demand for the retailer's products. This involves predicting how much stock will be needed and when it will be needed to meet customer demand.

4. Replenishment Planning

After demand forecasting, the supplier develops a replenishment plan. This plan determines the optimal timing and quantity of stock to be delivered to the retailer's location.

5. Order Placement

The supplier places orders with their manufacturing or distribution centres to restock the retailer's inventory. These orders are based on the agreed-upon replenishment plan and factors like lead times and transportation logistics.

6. Order Fulfilment

Once the orders are received, the supplier ships inventory directly to the retailer's warehouse or fulfilment centre, ensuring shelves are stocked with the right products when needed.

7. Performance Evaluation

Both the retailer and the supplier regularly evaluate the performance of the VMI system. This involves assessing key metrics such as inventory turnover, fill rates, and stockouts to identify areas for improvement.

8. Continuous Improvement

Based on performance evaluations and feedback, the retailer and the supplier collaborate to refine and optimise the VMI process further. This may involve adjusting inventory levels, fine-tuning forecasting algorithms, or optimising order quantities.

While this offers a general look at the Vendor Managed Inventory model, understand that there isn't a one-size-fits-all approach. The way VMI systems function depends on factors like the relationship between vendors and sellers, order sizes, access levels, and overall business operations. As a result, organisations may adopt various types of VMI systems. Let's explore some common scenarios and types.

Types of VMI Management 

1. Total Vendor Control

The vendor has full authority over inventory management. They monitor levels, predict demand, and initiate reorders as needed. The seller's role primarily involves inspecting orders for quality and quantity upon arrival.

2. Partial Vendor Control

The vendor holds some control over inventory. They utilise tools to track and inform the seller of stock levels, while the seller is responsible for placing reorder requests and determining timing.

3. Limited Vendor Control 

The vendor has minimal influence over inventory. They may review order levels but rely on the seller to initiate new orders. Quality inspection and transportation arrangements fall within the vendor's scope.

4. Vendor-Led Shipment Scheduling

The vendor tracks inventory and arranges shipments after internal checks. However, transportation is coordinated by the seller's logistics partners to minimise costs, especially for frequent reorders.

5. Fixed Delivery Schedules

The vendor adheres to predetermined delivery schedules based on set order levels. While their visibility on inventory is limited, they can only schedule new deliveries within established timelines. This setup is common for project-based work with specific component requirements.

Benefits and Challenges of Vendor Managed Inventory

While Vendor Managed Inventory holds considerable potential for retailers, There are some trade-offs you should know about. Let's examine the pros and cons to gain a comprehensive understanding of this strategy.

Pros of Vendor Managed Inventory

Better Inventory Visibility and Control

VMI boosts inventory visibility and accuracy for retailers, leading to several advantages. Retailers gain better control over stock levels, reducing stockouts and excess inventory. 

This optimises replenishment, minimising delays and lowering carrying costs. Accurate demand planning ensures prompt customer service, enhancing satisfaction. Collaborative decision-making with suppliers improves supply chain efficiency. 

Supply Chain Optimisation

Vendor Managed Inventory is a powerful tool for enhancing supply chain efficiency and cutting costs. By implementing VMI, eCommerce stores benefit from accurate demand forecasting and real-time inventory updates, leading to fewer stockouts and backorders.

Plus,data-driven decision-making enables inventory optimization, cutting carrying costs and streamlining production planning. With automated order management and strengthened supplier relationships, VMI simplifies operations and reduces administrative burdens.

Reduced Lead Time

VMI streamlines order processing, reducing wait times and enabling quicker order fulfilment processes. Retailers can use real-time data to fine-tune inventory strategies, ensuring they make the most of sales opportunities. 

Effective communication with suppliers allows retailers to act fast and minimise disruptions. Ultimately, VMI helps retailers run smoother operations, keeping customers satisfied and sales flowing.

Customer Satisfaction and Loyalty

Vendor Managed Inventory is pivotal for retailers in enhancing customer satisfaction and loyalty. With VMI, retailers ensure improved order fulfilment, streamline order processing, and promptly respond to changing customer needs. VMI allows retailers to offer personalised product offerings and consistent availability, reinforcing trust and satisfaction. 

Cons of Vendor Managed Inventory

Data Privacy Issues 

Data sharing and information security are pivotal concerns for retailers adopting VMI. It's crucial to safeguard sensitive inventory data and enforce robust security measures. This involves addressing data integration challenges, establishing confidentiality agreements, and ensuring compliance with regulations. 

A secure technology infrastructure and comprehensive employee training are imperative. Navigating these challenges effectively is essential for the success and integrity of VMI initiatives.

System Integration

Integrating Vendor Managed Inventory with existing systems and processes poses significant challenges for retailers. It necessitates system compatibility for seamless data exchange between various systems, such as ERP, inventory management software, and order processing. 

Real-time data synchronisation between internal and supplier systems is crucial for accurate inventory tracking and demand forecasting. 

Additionally, process alignment requires redefining roles, establishing communication channels, and adapting workflows to meet VMI requirements.

Supplier Dependency Risks

Ecommerce businesses in vendor inventory management may find themselves overly reliant on their supplier, hindering flexibility in supplier choices. Switching to alternative suppliers for cost or convenience becomes challenging, risking supply chain disruptions. 

While partnering with multiple suppliers is a common strategy to mitigate risks, VMI restricts this flexibility. Moreover, existing suppliers may exploit this dependency by increasing prices, compromising quality, or providing inferior service.

Top 5 Best Practices for Vendor Managed Inventory

1. Conduct a Thorough Vendor Selection Process

A rigorous vendor selection process is crucial to choosing the right Vendor Managed Inventory partner. Engage specialists who understand how to assess VMI providers effectively. Research supply chain management companies offering VMI services and tap into industry networks or trade shows.

Take the time to evaluate candidates based on their track record, industry expertise, and client feedback. 

2. Maintain Clear and Consistent Communication

Transparent communication is vital for successful VMI management. Schedule regular meetings to discuss forecasts, shipment schedules, and any issues. Share inventory data and market changes openly to enable informed decisions. Collaborate closely to address challenges promptly and find solutions together. 

3. Keep Vendors Informed of Demand Changes

Keeping vendors updated ensures efficient inventory management and prevents unnecessary costs. So, keep vendors informed of any unexpected shifts in demand, such as declining sales or changes in product popularity. Promptly notifying suppliers helps prevent overstocking by avoiding unnecessary deliveries of excess goods. 

4. Implement Advanced Inventory Strategies

Your VMI framework should be adaptable to unforeseen events and rapidly changing market conditions. Therefore, consider adopting advanced supply chain management techniques. Some of these strategies are Just-In-Time (JIT) inventory, Available-To-Promise inventory, Safety stock analysis, etc. These approaches enhance efficiency and agility, ensuring your inventory remains aligned with demand fluctuations and minimises excess stock.

5. Define Clear Performance Metrics and Goals 

Establishing key performance indicators (KPIs) with your vendor is essential for a successful VMI partnership. Identify key indicators like inventory turnover rate and fill rate, aligning them with your business strategy. Establish service level agreements (SLAs) with vendors to outline expectations and responsibilities. Regularly monitor performance and make adjustments as needed to optimise inventory management within the VMI framework.

Conclusion 

Vendor Managed Inventory aims to reduce inventory costs for both suppliers and retailers. By allowing suppliers to control inventory levels, it ensures timely replenishment, minimising overstock and associated expenses. This approach saves retailers time on inventory planning and reduces the need for excessive ordering and storage space. 

However, the success of VMI hinges on the supplier's ability to effectively analyse retailer data and make informed decisions about inventory replenishment.

If you're uncertain about finding a vendor with this capability or having minimal inventory control, yet seek to offload inventory management to an expert then a Third-Party Logistics (3PL) provider like PACK & SEND might be a better fit for you.

Here's how PACK & SEND eCommerce order fulfilment services give you the peace of mind to focus on the development of your business instead of managing logistics—

• Our eCommerce order fulfilment technology integrates with your online store, processing orders swiftly and providing real-time inventory and delivery tracking. Customers receive unique links for live delivery updates, enhancing their shopping experience and driving repeat sales.

• Personalised service is our priority. With PACK & SEND, you get tailored solutions and direct access to our team. Reach us anytime and benefit from dedicated account managers for personalised support.

• No minimum order quantity or contract period with PACK & SEND. Store and ship any number of orders without restrictions. Flexible solutions tailored to your needs without long-term commitments

• PACK & SEND offers micro-fulfilment solutions for efficient and fast shipping. With 100+ small format facilities across Australia, we place inventory close to customers for rapid delivery, sometimes within three hours. Customers can also conveniently collect orders from our Service Centres.

• We offer custom packaging solutions, including branded boxes, to elevate your unboxing experience. Additionally, we can include gift notes or other items to enhance your brand delivery experience.

• We offer fast, reliable, and competitive eCommerce delivery services. With our extensive network, we negotiate the best delivery prices for you and integrate multiple carriers into one solution, simplifying invoicing.

Ready to elevate your fulfilment strategy and cut costs? PACK & SEND can swiftly onboard you. Contact us now to discover more or to request a micro-fulfilment quote.

Frequently Asked Questions (FAQS)

What is Vendor Managed Inventory (VMI)?

VMI is a supply chain management practice where the vendor (supplier or manufacturer) manages and replenishes a customer's inventory. This involves monitoring stock levels, forecasting demand, and automatically restocking products as needed.

How does VMI benefit eCommerce businesses?

VMI benefits eCommerce businesses by streamlining inventory management, ensuring product availability, and fostering better collaboration with suppliers. This leads to reduced inventory costs, improved operational efficiency, and enhanced customer satisfaction.

When should VMI be used?

VMI is ideal for retailers handling diverse products from numerous vendors. Managing inventory from multiple suppliers can take time and effort for retailers. By implementing VMI, retailers delegate inventory management responsibilities to their vendors. This shift enables vendors to replenish stock promptly, benefiting both parties by driving sales and revenue.