So, what is VMI? VMI, or Vendor Managed Inventory, is a collaborative approach between the buyer and seller of goods to manage the buyer’s inventory levels. Traditionally, the transactional relationship between the buyer and seller is that the buyer would send a purchase order to the seller stating the product(s) the buyer wishes to purchase, the quantity of that product(s), the unit or lump sum price for that product(s), the ship-to address information, and any other information that the buyer deems necessary to communicate in order to complete the transaction. The seller would then process the order on their end, and the product(s) would be scheduled to ship to the buyer. The VMI approach is more of a partnership arrangement between buyer and seller, with freer flow of information and a level of shared responsibility.
Objectives of a VMI Program
Aligning business objectives of both the customer (buyer) and supplier (seller), while optimizing the supply chain efficiency, are the core goals of any VMI program. By accomplishing these goals, both the customer and supplier can expect increased profitability to their perspective companies. In addition, both companies benefit from the transparency of information. With improved information flow, both companies can move from a customer/vendor relationship, where one side typically benefits from the relationship more over the other, to more of a partnership, where both parties realize added benefits from the business relationship beyond the mere transactional one.
Pros for the Buyer
The customer can expect several desirable outcomes as a result of this joint effort. First, a reduction in standing inventory allows for, not only dollars to be utilized for other spending needs, but also allows for additional free facility space that can be allocated for other uses. With shared responsibility for appropriate inventory levels, the customer can expect fewer instances of excess stock that can too easily become obsolete, while also expecting fewer shortages on products they do need, which could subsequently delay fulfillment/delivery of products to their own clients. Since the supplier takes on the ownership of adjusting inventory levels based on actual demand, the increased flow of information reduces other costs as well. Fewer rush orders due to improperly managed inventory levels, leads to less waste of administrative resources for executing these urgent orders for the customer. VMI benefits the supplier on many levels as well.
Pros for the Supplier
The supplier can gain significantly from these arrangements as well. For starters, the supplier is able to manage a lower cost-to-serve the customer. By analyzing actual data, the supplier can, among other things, be sure to optimize their own production/inventory requirements to meet their customer’s demand, can plan delivery schedules in advance to save on multiple, often times excessive, shipping needs, and can also reduce the costly activities associated with filling urgent, last-minute orders. The supplier also typically realizes an increase in overall sales through this mutually beneficial partnership. Customers see VMI providers as what they are; valuable, problem-solving resources that provide a next-level service that frees up time for the buyer to engage in more productive activities for their company. The supplier is often the ‘go to’ resource when new demand needs arise since the buyers know they have an experienced source who their company already has an increased flow of information with, so the seller can provide valuable input that often times an outside source with little to no knowledge of the customer’s particular internal operation work can.
If you are considering learning more about how a VMI program may be structured to work for your company’s packaging, facility maintenance, and safety supply needs, just contact United Packaging and one of our Packaging Consultants will be happy to help you evaluate all of your options so you can make the best choice for your company.