The Basics & Benefits of Vendor Managed Inventory

Kelsie McMahon

April 24, 2019
March 30, 2021
Last Updated

First of all, what exactly is vendor-managed inventory and how does it work? Well, we're glad you asked! Vendor-managed inventory (VMI), as the name suggests, is an inventory management system where a supplier handles inventory for a customer.

If a supplier and a customer sign a VMI agreement, the supplier would be wholly responsible for holding inventory, handling reorders, and optimizing the process. This places heavy emphasis on communication. Since the customer is not responsible for inventory management and the supplier can’t be at the customer's location 24/7, it's imperative that both parties communicate through a secured electronic data interchange (EDI).

VMI aims to streamline the otherwise rigorous supply chain process. Better information flow and the division of labor can provide improved services, inventory turns, and sales. It also tends to be mutually beneficial. Let's take a look at some of the top benefits:

Lower Inventory Investment: The ideal VMI system would eliminate emergency reorders and rushed deliveries. VMI helps both parties better understand the economic order quantity (EOQ), eliminating over or under-stocked inventories. This helps to reduce any additional costs that may come up due to irregular inventory management.

Mutually Beneficial: Since VMI is a long-lasting contract between a supplier and a customer, both parties share the risk of inventory investment, especially entering new markets. This helps build an environment of trust, lower costs, strengthen communication channels, and streamline supply chains. 

Secured Data Sharing: VMI systems rely on the internet, more specifically the cloud, to effectively communicate and secure data. This means that all receipts, invoices, bills, etc., are available and shared online. Not only does this save paper but it also makes the process instantaneous and convenient.

Automatic Inventory Control: Since VMI is supplier-based, customers don't have to worry about making changes to their inventory system. Inventory levels will be automatically adjusted according to real-time market demand trends, which will reinforce their sales process and increase profits.

Efficiency in Inventory Management: VMI depends on accurate and automatic inventory accounts, eliminating the need for manual, time-consuming inventory checks that may be subject to human error. Employees can focus on growing other areas of business and the distributor saves valuable company resources.

Usually, when a supplier sends an inventory order, they send an advanced ship notice (ASN) after the purchase. Even this process can be enhanced by using an on-demand delivery services like Dispatch.

Dispatch operates through an app, which means that both the supplier and customer can track deliveries in real-time. This is especially useful for small businesses that require regular inventory updates. All the supplier has to do is tap a few buttons in the app, track the order, and Dispatch takes care of the delivery.

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