VMI, or Vendor Managed Inventory is a buzzword that has at times garnered a bit of attention in the e-business circles.  It isn’t a new idea, but it isn’t always well understood…so here’s a quick primer.

At its core, VMI is simply a partnership between a customer and supplier – the supplier assumes responsibility for maintaining the customer’s inventory levels in warehouses or stocking locations.  This is where it’s important to spend time on the critical first steps.  You need to put some thought into questions such as: which items make sense to replenish via VMI?  How much should I keep in stock for these items?  How much should be ordered when stock levels warrant replenishing?

Once the ground rules are established, communications between customer and supplier is key.  The supplier needs to know how much of an item is in inventory, how much is scheduled to be consumed, etc.  The customer needs to know when the next replenishment order is created, when to expect the shipment to be received, etc.  This is where e-business and EDI become important.

On a regular basis (typically daily), the customer’s business system communicates inventory levels to the vendor’s VMI system.  The vendor’s VMI system uses this data, paired with pre-determined triggers, to determine when replenishment orders should be created and how much quantity the orders should contain.  Once the order is created, it is automatically communicated from the vendor’s VMI system to the customer’s business system.  As the order is processed and shipped, the shipment information is transmitted from the vendor’s system to the customer’s system.  This enables the customer to have precise information about the expected shipments, enabling the creation of in-transit tags to speed up the receiving process.

Why Use VMI?

There are some obvious benefits to letting your vendor automatically replenish an item based on pre-determined triggers and activity.  There are some less obvious advantages as well.  The most obvious is that your staff spends less time managing inventory replenishment, and can therefore focus on more value-add activities (forecasts, pricing strategy, and so on).

In addition to the more efficient processing, the expedient information flow enables you to better manage inventory levels.  It is common for VMI users to report that inventory turns increase by 20{5080e6b8eec03ac51702ada5b6897314ab7bc3a139127375f379f0820275a75a} or more after implementation.  Furthermore, since VMI is driven by information that is automatically transmitted between computer systems, data entry time and errors are dramatically reduced – and your business can be provided with new insights such as knowledge of exact shipments coming from the vendor.   Each individual benefit – efficient processing, error reduction, and better / more timely information lead your organization to the ultimate benefits – improved supply chain integration and reduced workload.