What is Vendor Managed Inventory?

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What is Vendor Managed Inventory?

What is Vendor Managed Inventory?

Vendor Managed Inventory popularly known as VMI is gaining some momentum in retail business processes. Retailers are implementing supply chain optimization processes that will reduce their costs, reduce inventory levels and increase profits. Efficient supply chain management requires the rapid and accurate transfer of information throughout a supply system. Vendor Managed Inventory (VMI) is designed to support that transfer and provides some cost relief to suppliers and retailers customers. Vendor Managed Inventory is a continuous replenishment program using data exchanged between retailers and suppliers to enable the supplier to manage and replenish product at either store or warehouse level. In this model, retailers supply the vendor with the information necessary to maintain enough product to meet customer demand. This helps the supplier to anticipate the amount of product needed to produce or supply to the retailer.


Executive Commitment and Buy-in from Teams

If establishing a VMI program, it should be treated as a strategic initiative for the company, with the objectives communicated across the organization. The management team should understand the principles of VMI as well as inventory management through a vendor or third party. Teams should be given a complete overview of the VMI program, the benefits from VMI, as well an understanding of the business outcomes being sought. Support of inventory analysts, and replenishment planners is important for the success of this program.


Data Synch and EDI for VMI

Product data like GTINs, UPCs and other catalog information should match between retailers and vendors. Before beginning, product data should be reviewed and differences in product data should be resolved. A process for communicating the product data changes should be established. The EDI 832 is often used for this purpose.


Make sure vendors are set up in the EDI system. Cycle through inbound and outbound use cases. EDI testing is an iterative process and should be done covering all possible documents exchanged and for all types of products.


Data Exchange

There are normally two types of data exchanged between retailers, and suppliers when setting up VMI. The first is a one-time exchange of a retailer’s sales history to a point enabling the supplier a baseline for the inventory. The second data exchange is an ongoing update of product activity data exchanged via EDI 852 traffic. Product activity data exchanges primarily contain quantity on-hand, sales volumes, back orders, transfers, and returns. Product activity data exchange can be daily/weekly depending on the need. ANSI ASC 852, is the EDI document that is most used for product activity exchanges.


EDI Documents used in VMI

EDI is a critical piece of the VMI process. Here are some of the common EDI transactions used in VMI below:


830 Planning Schedule w/Release (Often used outside of Retail)

852 Product Activity

850 Purchase Orders

855 Purchase Order Acknowledgement

856 Advance Ship Notice

810 Invoice

Many relationships also include the EDI 830 (Planning Schedule w/Release), or DELFOR (EDIFACT) documents as a forecast. 


Ordering & Invoice Matching

Upon receiving the EDI-852 data, suppliers compare store activity against the reorder point (ROP) for each item based on the movement of data, and any overriding requirements. The difference, with modification based on planning across all items and locations is converted into orders. The created orders will be communicated to the retailer using the EDI 850 document. Some partners use the EDI 855 (PO Acknowledgment) in addition to the EDI 856. The 856 is sent before the shipment has been made. Once the shipment is sent off, the invoice (EDI 810) is sent according to the retailer’s requirements.


Once the retailer receives the product, invoices are matched, and payments will be made accordingly. The distinguishing point in VMI processes is the ownership of the inventory. VMI does not change the ownership of the inventory.


Metrics + Measurement

An effective measurement process should be agreed upon and implemented to monitor the success of the VMI program. This should include improvements In stock availability, inventory turnover, reduction, and distribution.


Setting up the Agreements

As discussed earlier, in the VMI process, the vendor creates the order and maintains the stocking plan for the retailer. To avoid situations where retailers question suppliers regarding the creation of orders for a product that they did not require and to prevent over and under allocations scenarios, agreements on Inventory turns, fill rates, frequency of replenishment, and SLAs should be predetermined.


Benefits of the VMI Process

The VMI process brings benefits to both retailers and suppliers. Some of those benefits are listed below.


Retailer Benefits

Reduced inventory: This is the most obvious benefit of VMI. Using the VMI process, the supplier is able to control the lead-time component of the order point better than a customer with thousands of suppliers they have to deal with. Additionally, the supplier takes on a greater responsibility to have the product available when needed, thereby lowering the need for safety stock. Also, the supplier reviews the information on a more frequent basis, lowering the safety stock component. These factors contribute to significantly lower inventories.


Reduce stock-outs: The supplier keeps track of inventory movement and takes over the responsibility of product availability which should result in a reduction of stock-outs, and increased end-customer satisfaction.


Reduce forecasting and purchasing activities: As the supplier forecasts and creates orders based on the demand information sent by the retailer (For example, EDI 852), the retailer can reduce costs associated with forecasting and purchasing activities.


Increase in sales – Due to less stock out situations, customers will find the right product at right time. Customers will come to the store again after a good experience, therefore supporting behavior that should lead to an increase in sales.


Supplier Benefits

To satisfy the demand, suppliers usually have to maintain large amounts of safety stocks. With the VMI process, the retailer sends the POS data directly to the vendor, improving visibility through forecasting.


Reduction in PO errors and returns: As the supplier forecasts, and creates orders, mistakes, which could otherwise lead to a return, will come down.


Both Supplier and Retailer can benefit from reduced purchasing of fuel (Expense, environmental improvements, and more).


Challenges and Limitations of VMI

The VMI process has challenges and limitations due primarily to personnel acceptance, training, planning, and oversight on process automation:


  • -Not leveraging POS data for manufacturing insight
  • -Shorting customers to prioritize VMI relationships
  • -Insufficient integration results in incomplete visibility
  • -High expectations from retailers
  • -Resistance from salesforce
  • -Skepticism from employees


Overcoming Limitations of VMI

Effective implementation of VMI depends on overcoming the limitations and addressing concerns of stakeholders transparently. Some of the concerns can be addressed as described below:


  • -Ensure data is clean and automated (VAN, catalogs, etc.)
  • -Consider an API-drive OMS+inventory system (EDI enabled).
  • -Conduct simulations and pilots before actual implementation
  • -Set up training sessions before launching VMI program
  • -Set reasonable targets using accessible metrics for benefits of VMI
  • -Establish agreements on service levels and process to handle exceptions


Supply chain optimization requires efficient and accurate transfer of information with in all the members of the chain. VMI facilitates that transfer of information and provides cost saving opportunities to both vendors and retailers.