Vendor managed inventory provides a streamlined approach to inventory management and order fulfilment, based on collaboration between suppliers and their customers (e. g. distributor, OEM or product end user) linking the supplier directly to actual consumer demand.
Essentially, VMI is inventory that resides with the customer while still monitored and managed by the supplier. The customer consumes directly from stock held on-site while the supplier has full visibility to the actual inventory levels. A special type of VMI is “consignment inventory, ” in which the customer holds vendor-owned inventory on-premises, and purchases stock only as it is consumed. We'll come back to this very powerful VMI option later on.
VMI changes the traditional order process and instead of sending purchase orders, customers electronically send daily demand information to the supplier. The supplier generates replenishment orders for the customer based on this demand information. The process is guided by mutually agreed- upon objectives for the customer's inventory levels, fill rates and transaction costs.
VMI software is an indispensable element in many companies’ demand-driven supply chain programmes, and can be especially advantageous in the Aerospace industry, with its deep and complex bills of materials and proliferation of parts depots. Whether used in manufacturing, subcontracting, or maintenance repair operations (MRO), vendor-managed inventory drives efficiencies while delivering significant benefits to cash flow and capital requirements. Consigning stock to the local warehouse reduces inventory risk and repetitive operational costs while smoothing out the whipsaw effect of uneven demand flow. Because ownership of the inventory stays with the vendor, production lines focus on their core missions, businesses manage cash and capital better, and still gain benefit from supply chain management. VMI aligns business objectives and streamlines supply chain operations for both suppliers and their customers.
For customer and supplier, VMI is a “rising tide that lifts both boats”. The closer, more effective working together to create demand visibility and share information needed for smart planning. Here are some key points to keep uppermost in mind as you implement a profitable and mutually beneficial VMI relationship.
Regular Reviews Lock in Productivity Improvements
One of the biggest opportunities for customer savings from VMI is the reduced cost of carrying inventory. VMI help increase turns by reducing the need for safety stock. Conduct weekly reviews of demand and inventory information. This allows close monitoring of order point calculations, making them much more accurate. Conduct weekly reviews of demand and inventory information. This allows close monitoring of order point calculations. The supplier will be better able to control the lead time component or order point calculations, making them much more accurate. Conduct daily comparisons on a regular schedule, as close as possible to the weekly/daily frequencies recommended above.