But what does it tell us? What is Vendor Managed Inventory?
According to 12manage VMI is a supply chain practice. The inventory is monitored, planned and managed by the vendor as ordered by the consuming firm. It is "based on the expected demand and on previously agreed minimum and maximum inventory levels."
On http://www.vendormanagedinventory.com/definition.php it is explained in similar words. For them VMI means to have an optimized Supply Chain with higher performance in which the manufacturer is responsible for maintaining the distributor’s inventory levels. It can be reached by giving the manufacturer access to the distributor’s inventory data and by making him responsible for generating purchase orders.
For better understanding they describe the VMI business model as follows:
- The manufacturer receives electronic data (usually via EDI or the internet) that informs him about the distributor’s sales and stock levels.
- The manufacturer can view every item carried by the distributor and point of sales data.
- The manufacturer is responsible for creating and maintaining the inventory plan.
- The manufacturer generates the order, not the distributor (But this doesn’t change the ownership!)
The NC State University http://scm.ncsu.edu/public/lessons/less030305.html explains that there are Benefits for both, customers and suppliers:
When the supplier can see that its customer is about to exhaust its inventory, the supplier can better prepare to replenish the customer because the supplier can then better schedule its own production/distribution. Customers will reduce/eliminate stockouts because they will not have to reorder goods at the last minute without knowing whether the supplier has the ability to restock without interrupting the customer’s operations. Therefore, part of VMI’s goal is to reduce uncertainty that arises when the supplier is blind to the customer’s inventory status.
As long as the supplier carries out its task of maintaining predetermined inventory and avoiding stockouts, it will be able to lock in a VMI-supported customer for the long term with or without a contract. This will produce a steady and predictable flow of income for the supplier and reduce the risk that the customer will switch suppliers (Switching would be too costly for the customer). A VMI arrangement will allow the supplier to schedule its operations more productively because it is now monitoring its customer’s inventory on a regular basis. Furthermore, reductions in inventory will be achieved once the supplier develops a better understanding of how the customer uses its goods over the course of a year.