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Writer's pictureSedat Onat
Oct 18, 20233 min read

VMI - Vendor Managed Inventory

What is VMI?

VMI – Vendor Managed Inventory is an inventory management model in which the supplier directly manages the customer's inventory.


VMI – Vendor Managed Inventory History

VMI is a collaboration between large retail chains and their suppliers that began in the early 1980s. The development of innovative approaches such as re-evaluation of order points and demographic-based procurement coincides with this period.



Traditional purchasing process

  • Manufacturer: The product needed for production is ordered to the supplier in optimum quantity and at the right time, and the incoming goods are kept in the warehouse until consumption. Methods are sought to consume the excess that does not enter into production. The supplier's responsibility begins when the relevant order is opened and ends when it is closed. Stock management is under the control of the manufacturer. (Intrieri, 2015)

  • Distributor:The products needed for sale are ordered to the manufacturer in optimum quantity and at the right time, processed and the incoming goods are kept in the warehouse until sale. Methods are sought for unsold products. The manufacturer's responsibility begins when the relevant order is opened and ends when it is closed. The distributor is responsible for order and stock management (Intrieri, 2015).


Supplier Managed Inventory process

  • Manufacturer: The supplier has all the stock, flow rate and minimum stock information of the manufacturer thanks to the live connection. Thanks to this instant information, it organizes the supply on time. It also takes back unsold goods with the MilkRun system. Management of the manufacturer's stock is the responsibility of the supplier.

  • Distributor: The manufacturer has all the stock, flow rate and minimum stock information of the distributor thanks to a live connection (EDI or Web-based). Thanks to this instant information, it organizes the supply on time. The distributor's order and stock management is the responsibility of the manufacturer (Intrieri, 2015). It also takes back unsold goods with the MilkRun system.



Stages

  • Minimum and maximum stock quantities are determined

  • Preferred supplier is determined and certified

  • The supplier brings the goods in appropriate quantities to the location requested by the customer (Factory, construction site, branch, etc.). Meanwhile, a 3PL company can be used (Intrieri, 2015).



Necessary infrastructure preparations

  • Electronic Data Interchange (EDI) infrastructure (Robinson, 2014),

  • Making necessary arrangements in ERP,

  • Preparation of the contract in accordance with the process,



Benefits for the customer

  • It reduces the amount of stock

  • Ensures that the stock is constantly kept at a certain level (Minimum standard deviation)

  • Healthier relationship with supplier

  • Decrease in total cost (TCO) thanks to economies of scale and reduced number of transactions (Lower unit prices, reduced number of personnel, etc.)

  • Shorter response times thanks to reduced number of transactions

  • Orders can be placed automatically from the system without the need for additional effort (Intrieri, 2015).

  • Returns decrease (Intrieri, 2015).

  • Puts full responsibility on the supplier

  • Gives the supplier the necessary information instantly

  • Reduces management costs (Intrieri, 2015).

  • It allows timely supply.

  • Prevents unnecessary stock space occupancy.

  • Positive impact on cash flow and possibility of return, as there is no obligation to pay until the relevant material is used (Consignment Stock).

  • Reduced risks of stock out

  • Problems can be prevented before they occur, thanks to a long-term and close relationship with the supplier

  • The possibility of errors is reduced by entering orders from a single point (Intrieri, 2015)

  • Branches are relieved of their workload by delegating order responsibility to the head office (Intrieri, 2015)

  • More accurate planning can be made thanks to the live tracking of the branches (Intrieri, 2015)



Risks for the customer

  • The problems caused by being dependent on a single supplier.

  • Problems of protecting Know How

  • Possibility of not being able to benefit from price discounts in the market

  • Risk of being tied to the supplier

  • Resistance to innovation by the supplier



Benefits for the supplier

  • Orders can be automatically received from the system without the need for additional labor (Intrieri, 2015).

  • Gives the supplier the necessary information instantly

  • Increase Inventory turns (Intrieri, 2015).

  • Returns decrease (Intrieri, 2015).

  • Reduces transportation and management costs (Intrieri, 2015).

  • It allows timely transfer.

  • It allows for a smoother logistics organization.

  • Problems can be prevented before they occur, thanks to a long-term and close relationship with the customer.

  • The possibility of errors is reduced by entering orders from a single point (Intrieri, 2015)



Risks for the supplier

  • Short and long-term financial liabilities that may arise if the customer is out of stock.

  • The situation of having to get a refund if the supplied goods are not sold (Intrieri, 2015).

  • Misleading inventory decisions due to lack of information.

  • Information transfer interruptions due to incompatibility problems with customer software

  • Failure to communicate fluctuations in market prices in a timely manner

  • Difficulties in quickly adapting to customer innovation demands


 

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