Vendor Managed Inventory (VMI) – Best Tricks to be Successful
Does your company believe in working with a smart approach and avoid incurring a loss? If yes, then VMI (Vendor Managed Inventory) is one of the processes you can rely on. It is a type of b2b business strategy between retail stores and vendors that helps you save on working capital as well as remove the headache of holding inventory in your books.
Let us understand in detail what VMI process is:
In a traditional setup for a retail store, usually the store owner buys inventory on their own and replenish the products based on their sales. However, in VMI setup, the vendors keep track on retailers inventory by making a visit to their store or pulling reports from retailers systems, checks the sold/unsold products and fills the space allocated accordingly. Merchandising decisions are made based on consultation with the retail store teams.
The vendor here holds the responsibility of managing inventory plans and generating the purchase order for replenishment. Of course, the retail store has to approve the replenishment orders since it’s their display space being utilized. Therefore the term – vendor managed inventory. The biggest point to note is that the ownership of the inventory remains with the vendors.
The goal of setting up Vendor Managed Inventory (from retail stores perspective) operations is to,
- Reduce inventory levels at retail stores
- Avoid stock out situation
- Improve inventory turnover
- Improve customer service
- Reduce inventory holding costs at the retail store’s balance sheet
The Vendor Managed Inventory enables a vendor to manage lead time for supplying goods in retail stores. Which, in turn, can help storekeepers to reduce their inventory level and stock out situations. As a result, it will help them avoid keeping excess inventory for backup.
Since the vendor pushes the inventory in batches to the retailer’s store based on customer’s demand, it will help them to inward the exact amount of stock required. With this, the inventory turnover improves along with customer’s service.
However retail stores need to monitor the entire inventory flows into their stores to avoid inventory dumping by the vendors. Ultimately every inch of the retail storefront is precious and should be used to promote products that actually sell vs. having stagnated inventory.
But what if you are already meeting the above goals without using VMI?
So let me throw some light on what actually the process is and how can it improve the workflow with improved profitability.
Traditional retail store operations involve many aspects like,
- Dealing with suppliers and shipment process that helps them having products in the store,
- Inventory management,
- Staff management,
- Store arrangements,
- Billing and money handling,
- Ensuring good customer service,
- Store display to attract customers, plus, a lot more.
It requires a lot of work to be done on the retailer’s side. However, part of their workload can be pushed to suppliers by implementing VMI.
Vendor Managed Inventory as a solution
Vendor Managed Inventory is a solution towards improving the supply chain processes at both retailers’ and vendors’ end. As the supplier here monitors the inventory level of stores and keeps them stocked up with the right SKUs. Payment terms will need to be agreed upon according to mutual understanding. So, the store owners will not require to manage their own supply and inventory management process. This here is taken care of by the suppliers.
But why would a supplier want to help the retailer to stock up their inventory? What benefit does the supplier get by helping the retail stores? Below we discuss the benefits that vendors get by implementing VMI processes with their wholesale clients.
Benefits of Vendor Managed Inventory
Benefits of VMI for Brands or Suppliers
- Inventory Transparency :
With VMI, being a supplier, having access to retailers inventory will help you understand the demand for your products. With a frequent visit to the store or real-time access to the retailer’s inventory levels, you get to know which products are selling fast and which are not. This, as a result, will provide you with transparency towards the inventory, helping you avoid a sudden surge in the sale as per the demand scenarios.
- Better space utilization in the supplier’s warehouse:
With knowing the demand for a particular product, you produce or fill in space with fast selling products. You get to know how often the products are being sold. As a result, you avoid keeping dead stocks, reduce production charges and control inventory with more flexibility.
- Cost cutting with space management:
With VMI, you can push your inventory to the customer’s location which they can store for months at zero cost. Since your customers always have a steady flow of the supplies, they would rarely be in any stock out situation.
Benefits of VMI for retail stores
- Avoid stockout situation:
Using VMI as a service is like a supplier taking on responsibilities of your inventory levels, keeping all the products stocked up on a timely basis. Without VMI, retailers will always have to be aware of reorder points to place a purchase order and miss on their deliveries.
- Better time and work management:
In retailing, along with daily business work, it also includes managing inventory, noting down the reorder points, creating purchase orders for replenishment and so on. Using VMI, these tasks can be excluded, allowing you to focus on other productive business needs like online channel management, introducing new products or coming up with new marketing tricks.
- Eliminate stock out losses:
VMI opens up the path for suppliers into customers inventory and diminishes the uncertainty involved with the inventory status. There will be no last-minute orders since the supplier has the ability to restock the customer’s inventory without any interruptions. But retailers should not blindly depend on suppliers and must deploy a monitoring mechanism on inventory thresholds.
Tricks to make VMI setup more effective:
Short term – long term goals / expectations:
The parties should share their expectations clearly with the other party. The supplier mostly suffers in this case with high expectations in the short term. They need to understand that the flow of production will start improving over time.
Agreement of sharing stock information on time:
If the supplier and customer agree on updating their stock details to each other on time, then there would always be a strong business flow between two parties. Especially there should be a scheduled forecast from the customer side.
Effective communication between two parties:
Effective communication and information sharing are necessary to work on the goals set by supplier and customer. They will need to look after every failed goal and understand the problems to avoid repeating them in the future. As failure help business to succeed fearlessly.
Common Mistakes made in VMI
– Sometimes the customer (retailer) applies for new deals /promotions in the shop and supplier finds a sudden spike in demand. This, as a result, can be a problem on the supplier’s side to manage shipments.
– When the customer doesn’t inform the supplier of the changes applied to his end (like the discount/promotions), the supplier cannot help customers with their unexpected demand.
– Not informing other customers when there is a high product demand from one customer’s end. Here, the suppliers need to maintain flexibility between their customers in order to adjust demands in a more flexible way.
Disadvantages of Vendor Managed Inventory
– The retail stores here need to have a deep trust in supplier/vendor since they share a part of their business responsibilities with them.
– If the vendor is not able to fulfill customers demand or handle the responsibility, it would be a loss on customers end facing frequent stock-out situation.
How to start with Vendor Managed Inventory
If you are new to vendor managed inventory and probably thinking of starting up with the process and want to understand how can you work with it, then below example can give you an approach towards it.
In the below diagram, you will see, the vendor produces the products and distributes among the retailers equally. Once the sale is made, he compares the demand for products in each retail store. He notices the Product A and B made a better sale as compared to C. Vendor then does the Inventory Forecast and gets the count for the next production and distribution among the retailers.
The above example is based on small scale production data. Imagine distributing 100 product types having more than 1000 count each among 50 retailers and manually comparing and managing excel sheet for each. Quite tortuous isn’t it? To make this process simpler, there is a vendor managed inventory feature offered by companies delivering products and introducing growth strategies for retailing/manufacturing/e-commerce businesses.
One such company is EasyEcom which provides an omnichannel workflow experience for brands involved in manufacturing / retailing / eCommerce business across the globe. Few of its key features involve,
- Inventory Management for major marketplaces (Amazon/eBay/Etsy/Walmart)
- Warehouse Management
- Retail POS
- B2B eCommerce
- Payment Reconciliation
- Consignment Inventory and many more
Let us now see, what features does EasyEcom has for you to manage processes involve with VMI along with screenshots:
- Vendor Master section: This feature can be used by retailers to handle their vendor’s list and their activities.
- Customer Master: Here, the vendors can manage their customers and order quantities to be sent. Also, how many orders received from the retail stores.
- Product Master: Where the vendors and retail stores can manage their available products and manage their details.
- Inventory Forecasting: The inventory forecasting feature will show you the sold inventory and available inventory count, based on which, it recommends the order quantity for each product.
Let us know if they are missing out on any features in our comment section below.
Planning for VMI relationship involves both sides working together. Information sharing is key to a good VMI flow. The retailers here don’t have to share every detail of their inventory. However, the supplier should be aware of any seasonal or promotional changes made in the store.