What is Vendor Managed Inventory (VMI)?
Vendor managed inventory (VMI) is a supply chain agreement where the manufacturer or supplier takes control of the inventory management decisions for the seller or retailer. In supply terms this means the upstream agent is responsible for the inventory of the downstream agent. This type of agreement is also known as managed inventory, continuous replenishment program, or supplier-assisted inventory replenishment.
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How can Vendor Managed Inventory Be Applied Successfully?
Providing the customer data on sold items can be sent to the distributor then the following four steps apply for successful Vendor Managed Inventory.
- Upstream and downstream agents to plan collaboratively.
- Focus on quality forecasting; safety stocks, lead time, service level and ownership issues.
- Implement the VMI system together.
- Continuously review the VMI system and identify improvements.
What are the Advantages of Vendor Managed Inventory?
- VMI promotes ‘demand smoothing’ meaning production means demand.
- A VMI supplier can control downstream decisions that can help transportation decisions.
- VMI promotes long-term relationships (due to the costs of switching suppliers).
What are the Disadvantages of Vendor Managed Inventory?
- VMI programs are costly which can reduce working capital.
- Implementation of VMI can go wrong due to the technological capabilities of inventory tracking.
- Dependence on one supplier that uses VMI can be costly if performance degrades.
To find out more about this subject read the full knowledge paper: Vendor managed inventory