Vendor Managed Inventory

Vendor Managed Inventory (VMI), or Co-Managed Inventory (CMI) as it is also known, is enjoying wide-spread success as an easy-to-implement means of supply chain co-operation.  VMI is most useful in situations, where final market demand for products or components is relatively stable, but short term fluctuations in the supply chain are common.  The VMI concept has been used successfully in many packaged consumer goods processes, but the ideas behind it are generic enough to benefit a far wider range of industries.

Vendor Managed Inventory in brief:

  • A form of co-operation between supplier and customer in which customer shares inventory information with supplier.

  • Supplier accepts responsibility for replenishing customer's stock in a way that keeps the stock count within certain, pre-determined limits.

  • Customer ceases to make purchase orders for the items, instead supplier informs customer of the replenishments.

  • Where a purchase order document is necessary, it is generated automatically on the basis of the replenishment information.

Benefits of VMI on the customer side:

  • reduces or eliminates purchasing activities.

  • enables focus on strategic supplier management and process development

  • reduces or eliminates order backlog, since supplier is able to check availability and possibly even pack goods before notifying customer of replenishment quantities.  For the same reason reception work at the customer's warehouse is reduced.

  • inventory turnover and SKU availability (stock outs) in customer inventory should improve, as the supplier has the benefit of receiving demand information earlier than before.

Benefits of VMI on the supplier side:

  • improved visibility of customer demand enables supplier to postpone manufacturing decision thus reducing stock especially for B/C category SKU's where replenishments orders are relatively infrequent due to batch size economies

  • improved visibility translates into added flexibility in production scheduling

  • advanced co-operation creates a logistical lock between supplier and customer

A Supply Chain Audit of appropriate scope is usually useful for evaluating the potential of using VMI in a particular supply chain.