The ABC’s Of Vendor Managed Inventory

A look at how the customer/supplier relationship should work in order for both parties to get the most out of their VMI relationship.

Id 5674 Picture Vmi

We all know the that the goal of Vendor Managed Inventory (VMI) is to provide a mutually beneficial relationship where both sides will be able to more smoothly and accurately control the availability and flow of goods. In talking about VMI, I think it’s a good idea to go back and look at the principles that drive this strategy. In theory, it’s a win-win, right? But how many of us are confident we’re actually doing it right?

To answer that question, let’s take a look at how the customer/supplier relationship should work in order for both parties to get the most out of their relationship.

The Baseline: How VMI Works

When done correctly, a manufacturer or distributor in a VMI relationship assumes the role of inventory planning and management for the customer. Extensive and timely information sharing is a prerequisite so that the manufacturer/distributor can maintain a high degree of visibility of its goods at the customer’s location. Instead of the customer reordering when its supply has been exhausted, the supplier is responsible for replenishing and stocking the customer at appropriate levels. The upside for both parties? An inventory process that becomes a competitive advantage.

What’s in it for the Customer?

In a perfect world, the supplier can see that the customer is about to consume all its inventory (remember all that information-sharing?). The supplier can therefore better prepare to replenish the customer because the supplier can then better schedule its own production/distribution. With complete visibility to not only the stocking levels but also the projected forecast and perhaps even the consumption levels, the supplier is able to further improve its accuracy in serving the needs of its customer.

When this works properly, customers will reduce/eliminate stockouts because they will not have to reorder goods at the last minute without knowing whether the supplier has the ability to restock without interrupting the customer’s operations. Therefore, part of the goal of VMI is to reduce the uncertainty that arises when the supplier is blind to the customer’s inventory status. Removing that initial level of volatility will foster more trust in the relationship between the customer and supplier, allowing the process to be managed more by exception, rather than by chasing transactions. 

What’s in it for the Supplier?

As long as the supplier carries out its task of maintaining predetermined inventory and avoiding stockouts, it will be able to lock in a VMI-supported customer for the long term with or without a contract. This will produce a steady and predictable flow of income for the supplier and reduce the risk that the customer will switch suppliers (i.e., switching would be too costly for the customer, possibly as a result of a qualification process, line setup, etc.). A VMI arrangement will also allow the supplier to:

  • Schedule its operations more productively because now it’s monitoring its customer’s inventory on a regular basis;
  • Develop a better understanding of how the customer uses its goods over the course of a year, leading to reductions in inventory; and
  • Stop hedging in its inventory carrying as a result of the trust it will now have in the information and its understanding of the customer demand.

The collaboration becomes more mutually beneficial over time as the goals to serve are better aligned and the mindset moves from vendor handled inventory to truly vendor managed inventory. 

It’s a fact that in the supply chain, change is the only constant. Because of this rapid pace of change, mastering the basics of any new approach is essential to ensuring long-term success. Once you have these VMI basics down, it’s like knowing your ABCs, and you can put the “m” back into VMI, allowing you to maximize the opportunities from this reciprocal relationship.

Tariq Choudry is E2open’s Vice President, Americas, Field Operations.

More in Supply Chain