Vendor Managed Inventory (VMI)

With vendor managed inventory, the supplier takes over inventory management and replenishment planning at the customer's site. The supplier therefore decides when the customer must receive which goods.

What is Vendor Managed Inventory? 

VMI stands for "Vendor Managed Inventory", which means that the supplier assumes responsibility for inventory management and disposition of the customer's warehouse. The prerequisite is the regular transmission of all relevant data, such as inventory and consumption, to the supplier. VMI optimizes performance along the supply chain and thus improves a company's operational value creation. Vendor Managed Inventory (VMI) is therefore a form of optimization for inventory management and order processing.

How does Vendor Managed Inventory work?

Classic VMI is based on electronic data exchange. Vendor Managed Inventory is implemented with a system that connects both suppliers and buyers. A prerequisite for a smoothly functioning Vendor Managed Inventory is therefore a close relationship between supplier and customer. A common objective is also set, which is monitored by both parties.

The supplier is given access to all the customer's relevant data. This includes, for example, demand values, current stock levels and orders. The VMI software then analyzes this data and calculates delivery recommendations for the supplier, which are sent to the customer to create transparency. The software updates this data on a regular basis. The supplier takes over responsibility for the retailer's complete inventory management and therefore no longer has to wait for an order, but can look in the system to see what is needed. For him, this results in more freedom in the disposition of the goods to be delivered.

What are the benefits of Vendor Managed Inventory?

The successful introduction of VMI leads to an improvement in the economic environment. There are numerous advantages for both the retailer and the supplier:

Benefits for the supplier:

  • Optimized performance along the supply chain
  • Flawless flow of information
  • Supplier takes responsibility for complete inventory management and ensures optimal stock levels
  • Production and inventories can be planned more flexibly and efficiently
  • Improved service level

Benefits for the customer

  • No out-of-stock situation for the dealer
  • Misunderstandings in communication are eliminated
  • Improved added value for the company
  • Decreasing logistics costs
  • Ideal stock levels
  • Fewer administrative tasks

Goals of VMI

Increasing demand and diverse product ranges make it difficult for value-adding processes in logistics to run smoothly. Coordination problems within the supply chain can lead to the so-called bullwhip effect. This describes the increasing fluctuations within the supply chain: Above-average demand for individual products can lead to out-of-stock situations. The ability to deliver is impaired and, in the worst case, customers switch to the competition. This results in lost sales for the company and the supplier. Vendor Managed Inventory helps to simplify the areas of ordering and delivery in supply chain management.

The VMI concept brings decisive advantages for both the customer and the supplier. Misunderstandings in communication are eliminated through electronic transmission. On the supplier side, the company's own production and inventories can be planned more flexibly and efficiently. In addition, the supplier can view the relationship between inventory and orders and react more quickly to new influences. Consequently, he also improves his service level. 

The customer, in turn, benefits from ideal inventory levels and falling logistics costs. He has fewer administrative tasks, as he hands over responsibility for inventory management and yet always has up-to-date stocks in the warehouse and can thus reliably satisfy the customer's needs at the point of sale.

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