Vendor Managed Inventory

VMIVendor Managed Inventory (VMI) was introduced by Kurt Solomon Associates in 1992. VMI is a collaborative strategy between the buyer and supplier to optimize the availability of products at a minimal cost. Under VMI, the buyer authorizes the supplier to manage the inventory of stock-keeping units (SKU) at the buyer’s site(s) under a mutually agreed framework of performance targets. The buyer provides the supplier with sales and/or inventory status information whereas the supplier makes and implements decisions about replenishment quantities and timing.

VMI provides the supplier with the opportunity to better manage its own production, inventory and transportation cost. In exchange, the buyer typically receives price discounts or improved terms of payment from the supplier. A well-designed and developed approach to VMI can lead not only to reductions in inventory levels in the chain, but also to secondary savings arising from simplification of systems and procedures.

A supplier of industrial fasteners to a customer in the automobile industry supplies track-side and assembly positions, and is paid a predetermined sum for each vehicle completed and shipped. VMI avoids accounting for single or small quantities of low-cost items, and consolidates a large number of small payments into a smaller number of larger payments. The benefits are shared where buyers receive higher service levels, and improved cash flows. In return, vendors enjoy better visibility of changing demand and greater customer loyalty.

The real benefits are those which attach neither to the buyer nor the seller in particular, but to the supply chain as a whole. These include management undertaken by whoever is best positioned or qualified, a smoother flow of materials, an enhanced flow of information, simplified administrative procedures, and the placing of the competencies of supply more firmly with the supplier.

It is unlikely that vendor management will be seen as appropriate for all classes of inventory. Generally speaking, it is likely that category C items (wide range, low cost) might be seen as being particularly appropriate, where there is a wide market and a number of suppliers wishing to differentiate their offerings by virtue of service. Items where there is a strong interdependence between seller and buyer might attract consideration of the possibilities of VMI.

The great news is that a data-driven approach using Asprova has shown to achieve big improvements in forecast accuracy. Our users can now precisely estimate the future inventory of materials based on the quantity of finished products that consumers will purchase. In VMI collaborative environment, clients can then easily furnish their suppliers with these prospective materials requisition or their suppliers can simply access these records via Electronic Data Interchange. Hence, Asprova has been instrumental in successful implementation of VMI between our clients and their suppliers.

Photo credit: Flickr © Nick Saltmarsh

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