Vendor Managed Inventory - Explained
What is Vendor-Managed Inventory?
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Table of ContentsWhat is Vendor Managed Inventory (VMI)? What are the Types of Vendor Managed Inventory Systems?Examples of Vendor-Managed Inventory
What is Vendor Managed Inventory (VMI)?
Vendor Managed Inventory, also known as Continuous Replenishment and Supplier Managed Inventor, is an inventory management system where the vendor or distributor of the goods manages the inventory of those goods on behalf of the purchaser (either retailer or consumer).
The vendor or distributor of the product estimate the expect demand for the goods and establish minimum and maximum inventory levels with the retailer or consumer.
The vendor then establishes a system for monitoring inventory levels, allocates product to replenish sold goods, and manages the supply chain (manufacturing to delivery) of the product.
VMI is generally requires the use of an Electronic Data Interchange system that connects the Vendor and Retailer/Consumer.
VMI supposes that the suppliers of inventory are in a better position to manage inventory based upon their knowledge of the goods, production capacities, and lead times. This approach reduces the number of layers in the supply chain, increases stock visibility, and reduces the overall inventory levels.
What are the Types of Vendor Managed Inventory Systems?
There are two common forms of vendor managed inventory system:
- Efficient Consumer Response (ECR) - A wholesaler (or distributor) manages the inventory for a retailer.
- Manufacturer-Managed Inventory - A manufacturer of goods manages inventory levels for a distributor of the product.
In each of these scenarios the inventory is owned by a party that is not involved in managing it.
Examples of Vendor-Managed Inventory
Fast—Moving Consumer Goods - For example, a big box retail store may allocate shelf space for a distributor of a specific product. The distributor manages the sales of the inventory and makes certain that the shelves are stocked.
Self-Service - For a second example, a fast-food restaurant may allow a drink company to monitor and manage the supply of soda available in the fountain drink dispenser.
Error-Sensitive Industry - Monitoring and replenishing supplies of Pharmacies and other Medical Suppliers.
Perishable Goods - Fruits and Vegetables in grocery stores.
High-Value, High-Demand items - Hi-Tec Industry.
Steps to Developing a Vendor Managed System?
The parties should undertake the following in developing an inventory management system.
- Open access to and reliable transmission of data and information about sales and inventory.
- Understand an inventory supply expectations - for example, minimum and maximum quantity levels.
- Allocation of risk and responsibility in the supply chain process.
- Establishing a monitoring system.
- Implementation, evaluations, modification cycle.
- Continued efficiency testing.