The ultimate goal of Vendor Managed Inventory (VMI) is cost reduction. VMI achieves this by better controlling material and information flow. In VMI, the supplier performs the function of planning inventory for the client. Information must be shared between the two parties to allow the supplier to manage a high level of inventory visibility at the client’s location. Rather than the client having to place an order when stock runs low, it is the supplier’s responsibility to continuously maintain an acceptable level of inventory at the client (ideally at point-of-use).
Benefits to the Client
Because the supplier maintains visibility of the client’s inventory, it can plan ahead and restock the client as needed since it has ample time to procure and distribute. This prevents the client from experiencing a stock out since there is no need for the client to reorder goods under pressure, without knowledge of whether or not the supplier can replenish or not. Thus, another objective that VMI has is to significantly reduce the worry and distraction suffered by the client that results from suppliers having no visibility of the client’s inventory position.
Benefits to the Supplier
VMI works so long as the supplier is able to continuously support the client’s inventory and prevent stock from running low. By maintaining this rhythm, the supplier is able to develop at long-term client relationship whether if they are technically under contract or not. It’s a win-win situation because on one hand the supplier will have a reliable stream of income while on the other hand, the client always has sufficient supply without wasteful overstock.
Furthermore, VMI agreements permit the supplier to plan its own internal activities more efficiently since it’s keeping track of the client’s inventory continuously without fail. Also, as the supplier gets a better grip on client consumption, significant reductions in inventory can be achieved, further reducing total cost for both the supplier and the client.
VMI benefits are why suppliers that specialize only in VMI, such as Falcon, are able to provide continuous cost reductions to its clients.
How to Ensure VMI Success
There are a few keys to ensure the success of a VMI initiative.
- 1. Define clear expectations.Upfront, there must be a comprehensive conversation on how the partnership will be advantageous to both parties in the long-term. Otherwise, short term results may end up disappointing one or both parties. Long term benefits should be clearly defined upfront, otherwise the agreement is likely to will end prematurely, resulting in a net loss for one or both parties. The goal is to maintain consistent and clear communication at all times. As both parties collaborate more, the relationship will operate more smoothly over time.
- 2. Agree on information sharing protocol.The more supplier and client openly share information with each other, pertinent to supply, the better the chance of achieving a smooth flowing system. Sensitive proprietary information need not necessarily be shared, however adequate information to keep a regular stream of goods is required. At a bare minimum, production forecasts should be routinely shared with the supplier to give the supplier adequate data to plan with it. In some cases, engineering will also need to share data more proactively with procurement.
- 3. Maintain open communication.Because there are multiple parties involved in a VMI arrangement, all parties need to discuss and meet often to talk about their objectives and the actions that need to be taken to reach those objectives. Once a VMI program commences, each party should expect that there will be some errors in the beginning. Mistakes should be treated as areas to learn and improve from. Thus, they should be openly and adequately discussed and resolved as they occur.
Common VMI Mistakes
Demand is something that the client will always need to be transparent about with the supplier. A sudden surge in demand could be due to a new contract that the client closed or maybe promotions that have caused demand spikes and disrupted normal flow. If the demand surge is large enough even a VMI supplier may struggle to meet your needs.
One way to avoid this problem is to ensure that your VMI supplier agrees to stock dedicated inventory reserved solely for your consumption only. This is a point worth ensuring is adequately understood. Dedicated inventory is not equivalent to a 99.9% fill rate. Dedicated inventory means inventory on-hand at your supplier that is reserved solely for your company and impossible for anyone else to purchase it. For example, Falcon’s internal systems make it impossible to sell one client’s dedicated inventory to any other entity. Thus, even if two unique clients consume the same exact item, Falcon cannot pull inventory reserved for client A to service client B.
Again, communication is key. In most cases the root cause for VMI failure is the breakdown of communication. This is why it’s important to thoroughly discuss expectations in the beginning. Doing so can prevent many mistakes from ever occurring in the first place.
The next step up from VMI but quite similar in nature is sometimes called Jointly Managed Inventory (JMI). Here, a strong partnership between the client and supplier emerges and further strengthens the existing VMI relationship.
While JMI is far more granular integration, the objectives are the same: reduce cost through improved control. JMI is simply a fine-tuned VMI built on the foundation laid by VMI. In a JMI partnership, there’s a greater deal of collaborative planning and integration between the two parties.
JMI can include but is not limited to integrating the supplier into the client’s point-of-sales (POS) system. POS supplier integration grants the supplier real-time visibility of relevant sales data, which exponentially improves the supplier’s ability to accurately plan and respond in a timely manner to the ebb and flow of demand. This further aids the supplier in ensuring it has the right amount of inventory at every point in the supply chain, ultimately improving control and reducing both supplier and client cost.