Defining Benefits of Vendor-Managed Inventory - A Primer for Supply Chain Partners

What is Vendor Managed Inventory (VMI)?

Vendor Managed Inventory (VMI) is a comprehensive inventory optimization strategy where the supplier/vendor takes on the responsibility of managing and replenishing inventory levels for their products at the customer's/retailer's location. This is done based on demand information, inventory data, and sales forecasts shared by the customer with the vendor.

In a VMI model, the vendor has complete visibility into the customer’s inventory data, consumption trends, and demand projections. Leveraging this data transparency through specialized analytics and planning tools, the vendor can schedule and execute replenishment orders for the retailer in a streamlined and automated manner while optimizing logistics costs. The vendor also continuously tracks various inventory metrics to ensure performance and health.

This collaborative approach differs from the traditional replenishment model where the customer/retailer bears the workload of tracking inventory stock levels, managing reorder points, and manually placing purchase orders with the vendor as and when deemed necessary. In VMI, this inventory management workload shifts from the customer to the vendor, enabling the customer supply chain team to better focus on value-added sales, operations, and customer service.

The streamlined VMI process typically works as follows:

1. The customer shares historical sales data, inventory data, consumption rate, and demand forecasts with the vendor on a real-time basis. This includes POS data, current on-hand inventory, average rate of sale per week, projected order quantity, etc.
2. Leveraging this data transparency, the vendor’s inventory management team feeds the shared data into statistical forecasting tools and analytics engines to determine optimal safety stock levels, reorder points, and replenishment order quantities that dynamically adjust to demand changes.
3. The vendor’s system then automatically generates purchase orders based on the reorder points and ships the optimum quantity from their warehouse to the customer location, thereby replenishing the stock.
4. Both parties have complete visibility into a range of KPIs through online inventory analytics dashboards to monitor performance, costs, and customer service levels achieved through the VMI arrangement.

The success of this pull-based, demand-driven VMI strategy depends heavily on high levels of collaboration, data transparency, advanced analytics usage, and process integration between the vendor and customer organizations. When executed effectively, VMI delivers significant benefits for both the upstream vendor/supplier and downstream retail customer.

Strategic Benefits of VMI for Suppliers/Vendors

From the vendor perspective, implementing VMI enables:

1. Increased sales - By actively managing inventory replenishment, the risk of stock-outs is drastically reduced, ensuring higher product availability and fill rates. This directly translates to higher retail sales.
2. Improved demand forecasting - Getting continuous access to downstream inventory status and POS data feeds the vendor’s predictive analytics models driving more accurate demand forecasts. This, in turn, enhances production planning.
3. Stronger customer relationships and retention - By directly adding value through inventory management, VMI strengthens collaboration and trust between the vendor and customer, resulting in higher retention levels.
4. Competitive differentiation - A robust VMI program can provide a source of strategic differentiation for vendors, allowing them to win market share through higher service levels.
5. Logistics cost optimization - Vendors can optimize logistics spending through improved shipment planning, better carrier and mode selection, point-of-origin consolidation, and better coordination across the supply chain network.

In summary, VMI allows vendors to drive higher fill rates and service levels while simultaneously controlling costs and securing customer loyalty over long-term horizons.

Tactical Benefits of VMI for Retail Customers

The retail customer also gains significantly from entering a VMI partnership:

1. Lower inventory costs - With the risk of stock-outs reduced based on vendor analytics, lesser safety stock buffers are required, directly reducing inventory holding/handling expenses. Ordering costs also decrease with consolidated orders.
2. Improved service levels - Product availability and on-shelf rates improve remarkably due to adequate inventory planning, rapid replenishment, and overall inventory health monitoring performed by the expert vendor’s team.
3. Lower administrative workload - The manual effort and headcount required for raising, tracking, and receiving purchase orders are reduced significantly as this workload shifts from the customer to the vendor in a VMI setup.
4. Access to expertise - Customers get access to state-of-the-art forecasting, inventory optimization, and demand analytics expertise through the vendor partnership that can plug capability gaps.

In essence, VMI allows customers to focus on improving core sales and store operations rather than peripherally managing inventory - leveraging the vendor’s specialization. The vendor’s deeper understanding of the product supply chain also helps structure inventory and logistics to smoothly align with evolving demand patterns.

Key Performance Indicators (KPIs) for Monitoring VMI Effectiveness

To ensure consistent benefits from VMI are realized and sustained, both upstream vendors and downstream customers need to collaboratively track and review certain key inventory health and performance metrics on an ongoing basis:

1. Inventory levels - Monitoring overall inventory levels across stock-keeping units (SKUs) is vital to maintaining adequate stock buffers without excess stock building up. Metrics like days of supply, and average inventory per SKU are useful.
2. Inventory turns ratio - The velocity at which inventory moves through the chain needs tracking. A higher turn ratio indicates efficient capital deployment and inventory planning.
3. Stockout percentage - Keeping physical stockouts infrequent ensures high service levels and availability. Technology can track eaches/units that go to zero stock during store replenishment.
4. Lead time - From the time a reorder point is hit to restored product availability, lead time metrics such as purchase order cycle time and transportation lead impact service level targets.
5. Forecast accuracy - As demand forecasts are the basis for inventory planning, tracking deviation from actual orders places helps enhance the predictiveness of the analytics models.
6. Supply chain responsiveness - How rapidly the chain can react to unplanned demand spikes also impacts customer service performance.

In an advanced VMI, perpetual inventory monitoring supported by predictive optimization analytics delivers the data for vendors and customers to collaborate and adjust the above operational metrics.

Step-by-Step Process for Implementing VMI

The following structured checklist summarizes the end-to-end process for a vendor and customer to successfully scope, pilot, and rollout a value-adding VMI program:

1. Set executive sponsorship - Secure buy-in from senior leadership across both organizations to align on VMI objectives and commit resources.
2. Map business processes - Jointly map existing procurement, inventory management, and logistics processes and decision rights to identify optimization areas through VMI.
3. Define key roles - Clearly delineate responsibilities between vendor and customer teams for forecast collaboration, inventory analytics, order generation, exception management, etc.
4. Select the pilot product(s) - Identify 1-2 relatively high-volume fast-moving products to pilot VMI across a few test stores for 8-12 weeks and gather learnings.
5. Test data exchange - Validate seamless data connectivity between vendor inventory management system and customer POS/WMS apps to enable accurate visibility.
6. Co-create policies - Outline inventory planning, ordering, and logistics policies such as reorder points, order frequency, lead times, etc thus aligning planning metrics.
7. Initiate execution - The vendor team manages the entire inventory replenishment process for pilot products as per VMI policies while tracking KPIs on defined metrics.
8. Review and expand - Analyze pilot results, fine-tune processes if needed, recognize wins, and expand VMI to cover more products/stores in a phased manner.

Following this structured, collaborative approach while securing engagement from both sides of the supply chain sets up a VMI program for sustained win-win success.

Realize the Potential of Vendor-Managed Inventory with Versa Cloud ERP

Vendor Managed Inventory delivers immense value for both vendors/suppliers and retail businesses by enabling collaborative inventory planning. However, the efficiency of VMI depends on seamless data connectivity and visibility across supply chain networks.

Versa Cloud ERP provides an integrated platform spanning inventory control, purchasing, warehouse management, manufacturing, quality analysis, finance, and analytics – all the capabilities needed for successful VMI adoption.

With strong inventory, warehouse, and manufacturing vertical functionalities coupled with embedded analytics, Versa equips your business to entirely own and optimize the VMI process in partnership with customers. Seamless data interfaces ensure enterprise-wide visibility while machine learning uncovers demand patterns.

Versa also facilitates ecosystem connectivity allowing suppliers, 3PLs, quality inspectors, and other stakeholders to collaborate on a common platform through flexible workflows.

As a cloud-native solution, Versa offers rapid deployment, scalability for growth, and constant platform upgrades ensuring customers remain at the forefront of innovation. Robust security protocols and configurable role-based access further support control and transparency across multi-site operations.

Whether your firm is the vendor/supplier initiating VMI or the retailer/buyer receiving automated replenishments, Versa perfectly meets all integrated planning, forecasting, ordering, and inventory management needs via the cloud.

To experience Versa's award-winning inventory optimization capabilities and how they can unlock the benefits of VMI for your supply chain, schedule a personalized demo today. Versa's team of experts will showcase how the solution can empower your business - be it a manufacturer, distributor, or retailer.

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