What is vendor managed inventory?

What is vendor managed inventory? 

Vendor managed inventory (VMI) is an inventory model in which the seller (vendor), not the buyer (retailer), is responsible for handling and restocking inventory. The two parties collaborate and communicate to ensure stock is sufficient. However, vendors decide when and what to restock when inventory levels are low, not the retailer.

Vendor-managed inventory vs consignment inventory

The main difference between vendor-managed inventory and consignment inventory is who owns and controls the inventory. A VMI system gives the retailer ownership of the stock once it’s delivered to their premises. With a consignment system, the vendor owns the product until it’s sold to the consumer‌ — ‌the retailer doesn’t pay for the stock until it sells. 

How does a VMI system work?

A VMI system differs from other inventory management systems because it relies on communication between vendors and retailers. The critical thing to note is that vendors control the inventory. They do all the ordering and re-stocking, not the retailer. In addition, unlike the consignment system, the retailer pays for the stock when it arrives at their premises.

The first step in a VMI system is setting metrics for success. Both vendor and retailer must be on the same page and agree to the terms and conditions of their partnership. Upon agreement, vendors can ship products to retailers, who, in turn, will provide up-to-date inventory data. This process makes monitoring stock levels and trends easy, allowing vendors to ship inventory as needed. 

Vendor managed inventory: benefits and challenges

VMI benefits

Reduced storage

Retailers don’t need as much storage space since vendors ship inventory less frequently and in line with buying trends. 

Less stockouts

When the vendor keeps an eye on inventory levels and replenishes stock before it runs out, stockouts are less likely. 

Better cash flow

Retailers can reduce holding costs and carry lower inventory levels, which helps improve turnover and cash flow. 

Improved production and delivery processes

Vendors can ensure they have the right materials to produce and deliver products in line with demand. 

Greater efficiency

Vendors can optimise the production and delivery process, reducing waste and improving overall efficiency. 

VMI challenges

Lack of data know-how

Understanding and analysing customer data is crucial for vendors to ensure stock levels are always accurate, which can be challenging. 

Slow-moving stock

VMI reduces the risk of overstocking, but it still happens. Unless the vendor keeps track of the data, you could pay for extra inventory you don't need.

Demand spikes

Some products are a success, while others aren't. Unexpected spikes in demand can impact vendor forecasts and lead to low stock levels or, worse, total stockouts.

Poor (or no) communication

Good communication is central to successful VMI. Little or complete lack of communication can result in incorrect orders, missed deadlines and misunderstandings.

Best practices for vendor-managed inventory for small businesses 

Build a trusting relationship with your vendor

A good retailer-vendor relationship is the beating heart of a successful VMI system. It’s essential to trust and rely on your vendor to restock when necessary and be proactive with forecasts, demands and data tracking. For you, a great working relationship means less friction in the inventory process, and for the vendor, it means the ability to forecast demand better.  

Establish a comprehensive VMI agreement

Your VMI agreement will ensure you’re on the same page as your vendor. A comprehensive VMI agreement should iron out all the fine details, like how you’ll communicate and how often, what data to track and any other important information that impacts stock levels. A solid contract protects both parties.

Clearly define your metrics and goals

Both vendor and retailer are working towards the same end goal: sales. Work with your vendor to develop a set of defined metrics and goals for measuring success. For example, you might discuss what you'll do with leftover inventory or when you'll process payments. These metrics will form part of your supply chain plan and allow you to adjust when issues arise. 

Communicate regularly and in detail

Demand and supply aren’t linear and can change dramatically from season to season. Stay in close contact with your vendors to identify trends before they impact your stock levels. Use this time to decide your primary communication channel, main points of contact and what systems you’ll use to record sales and stock levels. 

Implement the right VMI software solution

VMI software can give you real-time insights into inventory levels and sales patterns. Get a comprehensive overview of what's happening with software that you and your vendors can access. Automating parts of your vendor relationships will streamline your supply chain and save hours of your time. 

Take control of your stock with MYOB

If you decide you’d rather manage your inventory yourself, MYOB has you covered. 

MYOB is a business management platform that allows you to connect all your business workflows. This means your inventory software connects seamlessly with your accounting software, so your financial records are always up to date.

With MYOB’s inventory management software, you can get control of your stock with automatic re-ordering as supplies get low. The benefits for your business include:

• Ability to fulfil orders while keeping inventory costs as low as possible

• Better control over your hot-ticket items

• Insights into what’s selling and what’s not

• Ability to oversee your stock from anywhere

• Integrating additional functionality, as required.

Check out our plans and pricing and try MYOB - Free for 30 days.