An industrial valve manufacturer was struggling to align its network
of more than 50 suppliers; each supplier differed in lead time,
receiving time, and responsiveness, which left the manufacturer
constantly sorting through disjointed paper trails and accounts
In order to solve these issues and consolidate all of the supplier
information into one unified system, the manufacturer approached
Assembly Fasteners Inc. (AFI) for a solution. With over 30 years of
distribution service experience, AFI was able to suggest a Vendor
Managed Inventory (VMI) partnership.
Inventory can be a challenging component of running a business. If
inventory levels are too high, then money and space tend to be
wasted; if too low, sales opportunities disappear, and potential
customers are lost. As a response to this challenge, many companies
have decided to turn to vendor managed inventory (VMI) as an
What Is VMI?
Vendor Managed Inventory
is a partnership between the client company and its vendor, wherein
the vendor directly manages the inventory levels at the client's
outlets, while the client provides up-to-date forecasting
information to the vendor. For example, a retailer that sells
hardwood flooring may collaborate with a local supplier.
VMI would be implemented when the flooring vendor is willing to
manage the inventory levels that are sent out to the retailer's
outlets on a regular basis, based on close communication from the
retailer with regard to sales forecasts, marketing promotions, and
other considerations. Meanwhile, inventory that has already been
purchased by the retailer will continue to be stored by the vendor
until it is needed.
VMI adds business value by means of increased information flow. This
allows for improved:
- Usage Reporting
- Inventory Turns
The Benefits of VMI
VMI is a business arrangement that offers many benefits, both to the
customer and the supplier.
For the customer, the benefits include:
Removal of safety stock. Because of increased
communication between the customer and vendor, there is less fear
of long lead times for inventory replenishment. VMI and effective
Just-in-Time inventory practices often mean safety stock can often
be reduced or eliminated, allowing for more efficient use of
customer storage space.
Lower inventory levels. Along with the removal of
safety stock, lower inventory levels in general cut back on
purchasing and storage costs. Retailers and distributors may not
have to devote as many resources to warehousing operations.
Reduction in purchasing-related administrative costs.
With the vendor doing most of the heavy lifting on the
administrative end, the purchasing department can spend less time
calculating and producing purchase orders.
For the vendor, the benefits include:
Easier forecasting. When the supplier has
access to the customer's Point-of-Sale (POS) data, the
supplier's forecasting department can obtain deeper and more
accurate insights into its own company's production and
distribution needs. Instead of merely relying on second-hand
information obtained from the customer, this allows for a more
stable approach to supplier forecasting.
Clearer expectations and scalability. Along
with more effective analysis of end-user purchasing patterns,
VMI allows the supplier to prepare for upcoming promotional
initiatives on the part of the customer. This ensures a smoother
ebb and flow, as the vendor temporarily raises inventory levels
to meet the customer's expected sales, and then lowers them
again as the promotion period ends.
Eliminates landed costs. The vendor is
responsible for the cost of delivering the product to the
designated site, eliminating the landed cost to the customer.
Helps to cut costs. Because of this close
collaboration, the supplier also is able to keep costs down by
only carrying inventory levels that are commensurate with client
demand. Effective forecasting also enables the vendor to carry
less raw material inventory, and those savings can be passed on
to the customer through lower overall pricing.
How to Make VMI Work
If there is one word that sums up how customers and suppliers can
make VMI work, it is communication. Communication is vital to every
aspect of the VMI approach to supply and demand. Here are three
reasons why effective communication is crucial to the VMI
There must be agreement on how information will be shared between
the customer and the supplier. The process for giving and receiving
information must be crystal clear on both sides, since unexpected
spikes in end-user demand require quick adaptation from both
The two parties must clarify expectations. There should be a clear
and transparent discussion of the desired objectives for both sides
of the VMI partnership. Questions such as "How will VMI benefit both
our companies in the long term?" and "What short term obstacles will
we need to overcome?" should be answered at the outset.
Both sides need to keep communication channels open—this is vitally
important. For example, if the customer expects a spike in consumer
demand, it should clearly communicate that to its supplier post
haste. Likewise, if the supplier is updating its ordering software,
it should keep the customer in the loop.
Why You Should Work with VMI
As the above points demonstrate, there are many advantages to
working within a VMI framework. Both the manufacturer and
distributor greatly benefit from a well-executed VMI arrangement.
Business risks are shared – and thus reduced – for each party, while
at the same time both companies gain access to new markets.
Vendor managed inventory fosters better communication between the
vendor and the customer, and a greater depth of understanding into
each company's operational processes. Furthermore, VMI allows for
greater flexibility in meeting market demands, since adjustments to
inventory levels can often be made in real-time. VMI often reduces,
or even outright eliminates the need for emergency rush orders,
saving time and money for both parties.
VMI also allows companies to go paperless. Use of cloud technology
makes record-keeping and data-sharing simple and easy. Companies are
able to leave a greener carbon footprint by collaborating through
such cutting-edge technologies.
All in all, VMI is a much more streamlined process than traditional
inventory management systems. The customer's employees can spend
more time on sales, and less time on manual inventory counts, while
the suppliers are better able to manage production levels.
With so many advantages offered by vendor managed inventory, it is
understandable why many companies choose to implement this
arrangement into their business plan. At AFI, we offer custom VMI
solutions that can greatly benefit your company as well. For more