Vendor managed inventory, or VMI, is a process in which a vendor controls the flow of product to a buyer at an agreed inventory level according to supply-and-demand functions.
In other words, VMI makes sure the buyer always stays stocked with a certain good and the vendor avoids gaps in the supply chain of said product to its clientele.
Vendors will inform customers of shipment of new product using an advanced ship notice or ASN. This dispatch of product is known as an EDI 856. ASN’s are different from purchase orders in terms of timing and acknowledgement of the order.
The EDI 856, meanwhile, is generated upon shipment instead of at the time of purchase as with a purchase order. What are some of the benefits of VMI? The primary benefit is that the vendor is responsible for supplying the buyer with critical inventory items as they are needed.
This right-on-time approach can lead to decreased “safety stock” levels, lower inventory overall, and a reduction in administrative expenditures. The reduction or elimination of the practice of safety stock allows buyers the flexibility of utilizing that captured capital in other ways.
Lower inventory levels overall can help companies run a leaner, more responsive operation. In turn, this will benefit the customer in terms of reducing the cost of a product or making it more available and accessible or both.
Businesses that currently spend vast sums on storage and warehousing could shrink their footprint considerably using VMI’s responsive approach to inventory management. VMI’s benefits for the supplier or manufacturer of a good are myriad but most important of them all is direct access to the point of sale (POS) data.
Data like this can assist with forecasting for everything from production to marketing plans. Suppliers will also benefit from knowing that gaps in supply chain demand are being filled as needed. VMI in its purest form makes a firm’s productive capacity directly tied to its vendor relationships and thus enables it to be responsive and razor-sharp in terms of efficiency.
Though its benefits are numerous, VMI does involve a lack of direct control over certain key aspects of the business relationship. As such, they are often predicated on trust and established ties.
Such, too, can be a danger for firms that would often rather stick with the firm they know rather than venture out to find a new one for fear of a disruption in their inventory.
Because of this complacency, companies might be more willing to settle with a vendor that offers subpar service or less-than-competitive prices. Even so, the apparent benefits of vendor managed inventory VMI practices in their most optimal fashion cannot be ignored and, indeed, are likely to be embraced by growth-oriented firms that need to stay capital efficient and operationally unimpeded. For those companies, VMI’s responsive and integrated design offers a new way to do the same old things while lowering costs and freeing up capital expenditures in other ways such as warehouse inventory and administrative labor.