What is VMI or Vendor Managed Inventory?
Published on 27 October 2021
VMI (Vendor-managed inventory) is a modern technology that allows the supplier and the customer to jointly and mutually manage inventory, thereby reducing the risk of shortage or oversupply of each item, reducing the burden on the administrative staff of both sides.
A modern VMI system, such as GCR (Generix Collaborative Replenishment), automatically transmits the customer's inventory, sales volume, and other movements of goods (rejects, shipping, etc.) to the supplier. The supplier is able to monitor the availability of the client’s goods and accurately predict the timing and volume of deliveries. Such systems are especially effective in the face of unpredictable changes in demand due to extraordinary circumstances.
Implementation of VMI systems is especially relevant for:
- Food retail and FMCG with high turnover, regular promotions - for them prompt replenishment is of high importance, and accurate replenishment volumes reduce the risk of writing off Fresh products and related losses.
- All major retailers, which note the inefficiency of communication with suppliers in the traditional way and the high labor costs of ordering.
- Companies frequently facing a shortage or oversupply of products in the warehouse; the built-in analytics will help send orders on time and avoid overstocking the warehouse.
- Operators who have several distribution centers and send infrequent but large orders - such volumes of orders are difficult to predict "manually".
When we say that VMI is beneficial, we emphasize the mutual benefit. Implementing this tool positively affects every link in the supply chain, reducing the total amount of inventory retained and thereby increasing the turnover of each participant's assets.
VMI is ideally suited for a company's use of the pull inventory management strategy and the Just-in-Time (JIT) method, which involves minimizing inventory through prompt dispatch of orders.
The customer always has an arsenal of inventory managed by suppliers, and therefore does not lose sales and increases customer loyalty. Sales volumes are planned and consider many factors, such as seasonality or promotions, but primarily based on actual consumption of goods and the desired level of stock in the warehouse, so there is always enough product in stock, without oversupply. Human error and possible stocking mistakes are eliminated.
The supplier gets more information about actual sales and can better plan distributions and his safety stock, resulting in increased asset turnover and reduced risks of possible financial losses associated with, for example, the return of unsold products with expired shelf life.
Both client and supplier can use customized KPIs to determine the optimal inventory level: track sales by category, the number of returns or unserved orders and clarify their reasons, analyze inventory coverage data, and plan replenishment.
This inventory management system frees up the time of specialists who previously had to analyze stock levels on their own and "the old-fashioned way" of forming and sending orders to the supplier. And due to integration with order placement systems, employees who were previously busy receiving and processing orders also become freer.
Even though VMI is useful for both the retailer and the supplier, it is often difficult to implement.
To successfully use the tool, it is necessary to:
- Establish a trusting retailer-supplier relationship, as working with VMI is only possible on the condition of complete trust between the parties involved.
- To conclude an agreement on logistical cooperation and consider the detailed individual peculiarities of the companies rules and limitations.
- To establish a dialogue between IT, sales, finance, and marketing departments, because VMI is a system at the junction of several areas of responsibility, and the decision on the efficiency and correct work of tools should be made taking into account the opinions of all employees working with them
- Ensure that the data in the system is correct (coding, substitute goods, etc.).
Training employees to use the tool does not take much time, because VMI in SaaS format has a convenient, functional, and clear interface.
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The solution can be integrated into the existing OMS (Order Management System) or WMS (Warehouse Management System), thus providing full automation of business processes.
Generix Group North America provides a series of solutions within our Supply Chain Hub product suite to create efficiencies across an entire supply chain. From Warehouse Management Systems (WMS) and Transportation Management Systems (TMS) to Manufacturing Execution Systems (MES) and more, software platforms can deliver a wide range of benefits that ultimately flow to the warehouse operator’s bottom line. Our solutions are in use around the world and our experience is second-to-none. We invite you to contact us to learn more.