What Is Vendor-Managed Inventory? VMI Explained
by Jaidyn Farar
The more suppliers you work with, the more complicated inventory management becomes. Not only do you need to forecast demand and decide when to replenish stock, but you also have to place orders with each vendor and monitor every partner’s performance.
Vendor-managed inventory (VMI) can make things easier. But what exactly is VMI, how does it work, and is it the right option for your business?
What is vendor-managed inventory (VMI)?
Vendor-managed inventory (VMI) is a supply chain model where a vendor, or supplier, takes responsibility for managing a distributor’s inventory. The distributor shares their sales data with the supplier, and both parties agree on stock thresholds and performance standards. Then, the supplier takes charge of forecasting demand, monitoring inventory levels, and reordering when stock is low.
A central goal of VMI is to reduce stockouts and overstocking by using real-time data to make smarter inventory decisions.
Who should use VMI?
Vendor-managed inventory is often used by large retailers that work with multiple suppliers. It’s ideal for businesses that experience high inventory turnover and uncertain demand.
How VMI works
Before diving into the benefits of VMI, let’s examine the model in more detail.
- You establish a partnership and share data. You and your supplier form a partnership where you provide access to key data, such as sales trends, inventory levels, and demand forecasts. Together, you define important details like reorder points, stock levels, and terms for replenishment.
- The supplier monitors inventory. Though products are stored in your warehouses, the supplier is responsible for monitoring stock levels using their inventory management system. With real-time visibility, they can assess when stock needs replenishment without you having to manually submit purchase orders.
- The supplier reorders inventory as necessary. When inventory hits a pre-determined threshold, the supplier takes action by shipping the required products. This ensures you have the right products available at the right time.
Benefits of vendor-managed inventory
Vendor-managed inventory can pave the way for fewer inventory issues, significant cost savings, greater efficiency, and better supplier relationships.
Improved inventory management
Vendor-managed inventory helps your shelves stay stocked without you having to constantly track inventory or place orders. When working with a reliable supplier, you can expect to see the following benefits:
- Fewer stockouts. With the supplier proactively managing inventory levels, you’re less likely to experience stockouts, meaning you’ll see fewer frustrated customers.
- Less overstocking. By replenishing only when inventory reaches a specific threshold, VMI minimizes the risk of carrying excess stock that ties up capital and space (and eventually becomes obsolete).
- Faster inventory turnover. VMI ensures you have just the right amount of inventory to meet demand, helping you move products quickly.
- Shorter lead times. Because it leverages real-time inventory monitoring and automatic restocking, VMI can reduce the time it takes for products to move from your supplier to your store.
Cost savings
The benefits above correspond with cost-cutting opportunities.
With leaner inventory levels, you’ll reduce holding costs—the cost of the space, labor, and equipment needed to store goods. And with suppliers managing replenishment based on demand, you can also avoid wasting resources on slow-moving items, including those that become unsellable dead stock.
VMI also decreases the risk of stockouts, which means fewer lost sales and less reliance on costly rush shipping to restock quickly.
Greater efficiency
With VMI, you’re not responsible for tracking inventory levels, placing orders, or managing reorder points. Removing these tasks from your to-do list frees up your team to focus on more strategic opportunities, leading to greater efficiency in the long run.
Stronger supplier relationships
Vendor-managed inventory can help you build stronger, more collaborative relationships with suppliers. Sharing inventory data gives them greater visibility into your business needs, fostering a sense of partnership and trust.
VMI doesn’t just benefit your business; it’s a win-win solution. While you gain consistent, reliable inventory replenishment, suppliers benefit from improved forecasting and more predictable demand, which helps them optimize their production and shipping schedules.
Potential challenges of VMI—and how to overcome them
Recognizing the potential challenges of VMI can help you avoid them.
Challenge #1: Dependency on suppliers
Once you’ve committed to a VMI partnership with a supplier, it might be difficult and costly to make a switch if you’re unhappy with their performance.
The solution: Choose reliable suppliers, making sure to vet them thoroughly before entrusting them with your inventory management. Look for partners who have a track record of meeting deadlines, managing inventory efficiently, and being responsive to their clients.
Remember, it’s important to be aligned on goals, values, and expectations before signing any agreements.
Challenge #2: Data sharing
VMI requires sharing detailed sales and inventory data with your supplier, which can raise concerns about data security and confidentiality. Additionally, a lack of up-to-date data may lead to issues like stockouts and overstocking.
The solution: To overcome this challenge, you’ll need to make sure that your supplier has sound data management practices and can accurately process your data to drive decision-making. Additionally, choose tools that allow for seamless data sharing and inventory tracking.
Challenge #3: Inventory changes
When you add new products, suppliers may struggle to accurately forecast demand due to a lack of historical sales data. On the flip side, if you remove products from your lineup, the supplier might not get the memo in time and continue ordering them.
The solution: Prompt communication is key to ensuring that you and your suppliers stay aligned on changes.
In addition to sharing accurate and up-to-date sales and inventory data, make sure both sides agree on key details like reorder thresholds, delivery timelines, and forecasting expectations.
Automate every stage of the fulfillment process
Think of vendor-managed inventory as inventory management on auto-pilot. While your business still has a role to play, the heavy lifting is done by your suppliers. But that still leaves your business with other fulfillment tasks—including shipping.
Fortunately, you can automate that too! With a solution like EasyPost Enterprise Shipping, businesses can automatically integrate with carriers, verify addresses, create labels, and find the best rates. No heavy lifting required.