When a manufacturer has a surplus of inventory not adding value to their processes, that inventory is hurting the company’s balance sheet, and is wasteful. Having excess products on site increases the need for expensive warehousing space, not to mention the risk of obsolescence. These carrying costs ultimately put the enterprise at a financial risk.

Implementing a Vendor Managed Inventory (VMI) solution can remedy these risks and optimize your processes. At a glance, VMI provides real-time visibility of inventory and orders, planning and execution processes synchronized across all trading partners and tiers, and high level of product availability with minimal inventory levels. Still not convinced? Let’s take a deeper look into a VMI program.

What is a VMI (Vendor Managed Inventory) Program?

Vendor Managed Inventory, or VMI, is a business relationship where a manufacturer or distribution business takes over management of inventory for a retail or wholesaler. Using Electronic Data Interchange (EDI) or other electronic methods for communication, the vendor of the product will manage orders and fulfillment for those further down the distribution chain.

The goal with a vendor managed inventory relationship is to make sure the retailer only buys what they’ll sell. They maintain closer contact with the supplier, aided by technology, so that they can purchase stock in smaller batches, more frequently. Most importantly, the burden of inventory management is shifted to the seller, who pushes inventory down to buyers based on real-time demand.

Benefits of Vendor Managed Inventory

Leaner Inventory

There’s nothing worse than sitting on valuable, slow-moving products, and watching your cash sit idle as it collects dust in your warehouse. With a VMI program your supplier assumes the liability of all that tied-up cash. By simply letting your supplier know which goods you need and when you need them, you only have to wait for the shipment to arrive at your loading facility. Your VMI program will also keep you prepared for production gaps, such as holiday shutdowns, that can negatively impact your supply chain and create inventory shortages if not managed properly. 

Reduction of Sales Costs

Storage adds significantly to the costs of your product. You incur costs to store inventory waiting for an order and your customer incurs costs storing inventory waiting for a sale; therefore, you have collectively added significant costs to each item sold. When your vendor is managing your inventory, you don’t need the extra space and personnel to manage an abundance of your product. You will simply provide your vendor with your sales history. They will then use this information to forecast your demand and provide suggestions or order on your behalf based on the proposed schedule.

JIT (Just In Time) Inventory

Just In Time Inventory focuses on only ever having enough inventory on hand to meet current needs. The amount of inventory needed depends on your product type, how fast it will move off the shelves to consumers, and how long it will take to produce more. Your vendor will conduct a thorough analysis of your packaging needs to create a solution that is custom tailored for your business and ensure that you have your product delivered to you daily, weekly, monthly. This will inevitably free up cash flow as well as maximize your workspace for other core capabilities.

Advanced Forecasting

The more data you have regarding sales results, the more you can infer about customers, seasonal trends, the demand curve, and your product life-cycle. With the copious amounts of data gained by using a vendor managed inventory system, including historical data and an understanding of the causes of trends, you can improve accurate forecasts of the most likely scenario for increases and drops in demands. This will aid long-term strategic planning and short-term order fulfillment.

Useful for Small, Medium and Large E-commerce Businesses

If you think your company is too small to benefit from an inventory management program, you could be missing out. Despite what you think, this structure is not exclusively for large companies. For those struggling with the challenges of long lead times, a VMI program can alleviate some of those distresses.

By analyzing SKUs in multiple categories, your supplier can build containers to decrease overall stock and increase purchase frequency. This, in turn, allows you to maximize savings. Your vendor can help you make better buying decisions, including managing costs by reducing spikes and dips in inventory.

A VMI program with Victory Packaging provides real time visibility of inventory and orders, including inventory in-transit, at all your sites, including 3PL hubs, suppliers, and stores. Additionally, it automatically generates alerts when inventory violations occur against replenishment policies. The result is a program that enables true consumption-based replenishment in an environment where all trading partners can easily connect and coordinate with each other.