Thursday, November 07, 2013

What is Vendor Managed Inventory (VMI)?

I've seen the term Vendor Managed Inventory (VMI) used in about a million different manners now, and I just realized that the term is so liberally used, it can be cut up into various pieces that might make more sense for those uninitiated with or considering a VMI move in the supply-chain management world.  I don't want to argue the merits or demerits of VMI, I could probably write a book about it (whew! Looks like I don't have to?), but my take is that it's broken down into a few categories (I'm making it really simple for quick guide like sake):

Vendor Managed Inventory – Supply Side

Vendor Managed Inventory (VMI) in its purest form is when a vendor (supplier of goods) manages the inventory level AND stock level of its goods on a buyer’s (demand side) premise.  That is to say, they are responsible for scheduling / delivering a set amount of their inventory to a buyer’s stock room, and also re-stocking the buyer’s shelves with their goods.  Requisite levels of inventory are determined by sharing point of sales data (POS) and analyzing it in order to predict the best inventory level possible for the buyer based upon evaluated sale trends. 

Generally this system isn’t used as it requires the supplier of goods to be on site continually to make sure shelves are stocked.  This could mean a permanent resource on site or a daily visit to the buyer's location to ensure shelves are stocked and consumers have access to buy the goods.  With expensive, large, or slower moving goods, these human resource needs might not be as demanding, but the risk of losing a sale is very real if the good in question is not available to the customer seeking the product.

Vendor Managed Inventory – Supply/Demand collaboration

This is a growing, and usually more successful, form of Vendor Managed Inventory (VMI).  In a collaborative effort, both sides share sales data and analysis in order to fully optimize their inventories and sales opportunities.  In such cases, both sides divide up responsibilities (by agreement) and do their best to support each other as means allow (this can mean a lot of human communication, physical visits to buyer’s site by vendor, and  even sharing human resources at loading bays or even stocking store shelves, to get the job done).  Goods may be on consignment, delayed payment (90 day pay period on invoices), or purchased outright -- depending on agreement.

Vendor Managed Inventory – Buyer side

This is probably the most common form of Vendor Managed Inventory (VMI).  In Buyer side centric models, Vendors are usually leaving goods on consignment at the Buyer’s premise, and/or invoicing for a 90 day or more period before getting paid ... giving the demand side buyer time to make sales and earn cash before actually paying for the goods.  When this happens, usually the buyer is the sole entity responsible for keeping shelves stocked in order to make sales.  However, depending on the relationship and agreement, this type of relationship may demand that the supplier take back all goods not sold or alternatively that the buyer pay for the goods regardless if they’ve been sold or not.  Not the best system for creating trust and a positive business relationship among partners (hence why it’s in slow decline), but it’s still today the most dominate form of VMI.  Large players like Walmart almost use exclusivey this model, because they can.

Buyer Managed Inventory

This method is all but dead in the FMCGs business to all but the smallest players.  In this relationship, the buyer is wholly responsible for pre-purchasing goods to sell, incurring losses on items not sold, and responsible for all stocking/restocking of goods that are customer facing.  The vendor plays no role in the inventory process aside from dropping off goods at the bay doors of the buyer’s place of business.

Of course, there are hybrids in-between the above -- each one has a positive or negative element to them that might be better or worse for the supply or buyer involved.  Which one do you use?  Or which hybrid model do you use or do you think is best?  As stated above, these are mainly in the FMCG world, but they could apply to others as well.  Thoughts?


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