As a distributor considering participating in a Vendor Managed Inventory (VMI) program, you
might be asking yourself, “Why are companies doing this?” You have been managing your own
inventory levels for years and while your system is good, VMI can make it better. By working
together to improve inventory management, suppliers and distributors can improve key metrics
and enjoy an increase in sales together.
Distributors are participating in VMI programs because with VMI, distributors and suppliers are
taking costs out of the supply chain. More and more distributors are encouraging key suppliers
to include them in their VMI programs. VMI benefits to distributors include:
Reduce administrative costs.
Because your supplier is doing most of the work, your buyers spend much less time managing
those products. Experience has shown that buyers can manage at least twice as many SKUs on
VMI as they can manage using the traditional approach. That means you can re-allocate
resources to troublesome products or to other more value-added activities.
Synchronize Data
The VMI process enables distributors and suppliers to accurately match product information.
This guarantees error free purchase orders which ensures the right SKUs are ordered,
eliminating manual efforts for the accounts payable departments.
Minimize Returns Exposure
SKUs that are not returnable now become visible and product obsolescence can be managed in
the VMI process. With one push of a button, VMI returns become straightforward, parameter
driven and fast; thus getting stronger cash.
Streamline New Product Introduction
The VMI process gives a distributor the ability to quickly test market new products. The sales
performance becomes visible and results are easily tracked. Recommendations on new
products that should be stocked are based on actual performance, not gut feel.
Align Business Objective with Suppliers
The VMI process presents a distributor an opportunity to have a closer working relationship
with their best supplier partners. The communication lines and performance evaluation are
constant and transparent. Aligning business goals fosters stronger relationships and better
results.
Increase in Inventory Turns
One of the biggest opportunities for customer savings from VMI is the reduced cost of carrying
inventory. VMI helps increase turns by reducing the need for safety stock, because:
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Frequent (e.g. weekly) reviews of demand and inventory information enable close
monitoring of order point calculations. Also, the supplier is better able to control the
lead time component of order point calculations, making them much more accurate.
Frequent (e.g. daily) comparisons of on-hand inventory to order point ensures rapid
replenishment ordering when stock falls below order point. Also, the supplier is better
able to maintain order quantity factors such as pack size, so there are fewer problems
with order quantity calculations.
Decrease in Out of Stocks
VMI improves customer service rates (fill rates) due to fewer stock-outs. Primarily, VMI does
this for the same reasons it reduces the need for safety stock:
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Because the supplier now has full visibility of true demand along with better information
about factors such as lead time, product launches, and packaging changes, they can
better manage order calculations.
As a regularly scheduled automatic process, VMI will almost always recognize the need
to replenish before stock is out.
In addition:
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A supplier's VMI planner is more likely to investigate and respond to unusual
occurrences in demand or inventory since they are probably managing fewer items than
the typical customer buyer who is often managing items from hundreds of suppliers.
Suppliers often favor VMI customers in times of scarce supply in order to meet agreed
objectives.