Managing inventory has never been an easy task! It is a challenge that many businesses struggle with on a day-to-day basis. The constant fluctuation of costs and demands can further increase the difficulty in supply chain management. To some extent, this problem can be alleviated by deploying Vendor Managed Inventory (VMI). In VMI or Vendor Managed Inventory the manufacturer or supplier is generally in-charge of managing the customers’ inventory. By putting the onus of managing the inventory on the supplier or vendor, VMI helps businesses optimise their inventory and streamline inventory management.
There are a lot of ways in which VMI has made Supply Chain Management and Logistics more efficient. VMI has helped in improved alignment of customer demand and inventory as when the vendor takes full charge of the replenishment of inventory, it helps in allowing the supplier to dynamically adjust inventories in response to customer demand. The vendor can also choose to help the organisation manage its inventory costs by preventing them from stocking unnecessary raw materials. As a result, VMI not just improves the overall supply chain efficiency, but also makes the supply chain robust and resilient to seasonal changes.
By eliminating the bottlenecks caused by demand variability, suppliers can predict and coordinate manufacturer lead time and reduce disruptions from stock-outs.
If we shed light on procurement, the cost of logistics is more often than not, extremely high. By streamlining the process based on the needs of the customer organisations VMI has been extremely essential in helping their customers save on costs.
In a VMI relationship, the supplier controls customer inventory which helps them to achieve significant efficiencies. The ordering process is typically based on more accurate and up-to-date data, which allows for cost savings by achieving VMI benefits like these: For instance, VMI helps in reducing the frequency of costly last-minute orders and minimising the overall number of orders. It also helps in reducing returns owing to overstocking.
Also, if one has to forecast and plan owing to better data-driven insights, a VMI program takes the customer and supplier’s data, analyses them, and uses them to derive insights that can be used to drive the operation. The benefits of this process help both the supplier and customer. The supplier or vendor can collect data from multiple sources and organisations and use this to plan procurement and purchase decisions for the customer organisation. Most organisations that offer VMI to their customers have an idea of actual demand, and this can help all the organisations they purchase from.
Additionally, a VMI in essence is a symbiotic relationship and helps a great deal in reducing the bull whip effect in procurement. This helps in saving unwanted warehousing costs. Sometimes a fluctuation in point-of-sale demand of five percent can be mis-forecasted and this can be wrongly interpreted as a change in demand of up to forty percent. Therefore, organisations can inaccurately incur losses owing to unwanted inventory (originally planned to meet the demand that didn’t exist.
As we all know that supply chains are extremely complex and many organisations have an entire procurement vertical or team that is in-charge of streamlining the process. By deploying VMI, organisations, particularly small and medium scale ones can reduce the complexity of operations.
Having a VMI relationship ensures that the organisation need not procure the same product / similar product from multiple channels and helps them streamline and optimise the quality of the product with ease.
Is VMI the Right Way to Go for Your Organisation?
VMI most certainly has multiple benefits but need not always be the most suitable method of procurement. If your procurement process is extremely complex and involves hundreds or even tens of parts, it might be wise for you to ask your vendor about establishing a VMI relationship. It will considerably reduce the strain on your organisation.
Additionally, VMI isn’t a magic solution that can solve all your supply chain woes. Ensuring that your vendor has a robust system put in place to ensure the efficiency of warehousing and inventory management is of utmost importance.
By exercising due diligence and deploying VMI, an organisation can optimise the procurement process, cut down both direct and indirect procurement costs, simplify its processes and obtain several benefits. VMI has benefits for all stakeholders provided it is executed well.
Anish Popli is the CEO & Founder of ProcMart