Vendor Managed Inventory or VMI is a way to simplify inventory management and order fulfillment. VMI requires the collaboration between suppliers, distributor, retail, OEM, or product end user. This effectively changes the traditional ordering process for the better.
VMI’s purpose is to ensure that the business objectives of the suppliers and their customers are in sync by streamlining the supply chain operation’s information flow.
VMI effectively:
- Improves inventory turnover
- Improves overall customer service
- Increases sales
Customer Benefits of VMI Services
The goal of VMI is to improve the production of inventory with better communication between the customer and supplier.
The supplier can see when the customer is about to run out of inventory. This allows the supplier to plan more efficient production and distribution of a product. And the customer will not have to reorder products at the last minute.
Supplier Benefits of VMI Services
VMI services allow the supplier to schedule production because it regularly monitors the customer’s inventory.
How VMI Service Software Works
With VMI software you will be able to exceed your customer’s expectations with automatic product replenishment, invoicing, and smart product retirement algorithms.
- You set up customer consignment inventory and auto-replenishment triggers for products
- Use customized settings to configure each product/destination
- Streamline the process, by setting up invoicing, product replenishment and retirement algorithms to improve customer service
- You can maintain your own records of customer inventory based on automatically tracked inventory
When a supplier and customer begin using VMI, they first agree on objectives for inventory turns, the inventory fill rates or in-stock percentages, and the transaction costs. It starts with the customer sending the vendor a Product Activity Report which contains information on the sales, transfer, and inventory position (how much inventory is on-hand and if inventory is in transit).
The VMI software will analyze the data and create recommended replenishment orders based on algorithms. These algorithms factor in the frequency of product sale and the dollar rate of sales.
Jointly Managed Inventory
An enhanced form of VMI is JMI or jointly managed inventory. JMI includes the integration of the customer and vendor systems. This gives each partner direct access to the other’s data for planning processes.
Managed inventory systems result in improved customer-vendor relationships through shared objectives through a streamlined process designed to improve both the customer and supplier’s business. Managed inventory systems also help decrease operating costs by reducing over production and enhancing communication of data between supplier and customer. Improving processes and customer supplier relationships, leading to additional orders.
The open communication required for managed inventory systems to work efficiently leads to an improved understanding between the supplier and customer, of each other’s business operations and allows for joint planning and inventory management.
In conclusion, through vendor managed inventory services, a vendor builds a long-term alliance with their customer because the customer knows that their risks are reduced, and they will have a much better cash flow.