Vendor-managed inventory (VMI) is a family of business models in which the buyer of a product provides

certain information to a supplier of that product and the supplier takes full responsibility for maintaining an
agreed inventory of the material, usually at the buyer's consumption location (usually a store). A third-party
logistics provider can also be involved to make sure that the buyer has the required level of inventory by
adjusting the demand and supply gaps.

As a symbiotic relationship, VMI makes it less likely that a business will unintentionally become out of stock of
a good and reduces inventory in the supply chain. Furthermore, vendor (supplier) representatives in a store
benefit the vendor by ensuring the product is properly displayed and store staff are familiar with the features of
the product line, all the while helping to clean and organize their product lines for the store.

One of the keys to making VMI work is shared risk. Often if the inventory does not sell, the vendor (supplier)
will repurchase the product from the buyer (retailer). In other cases, the product may be in the possession of the
retailer but is not owned by the retailer until the sale takes place, meaning that the retailer simply houses (and
assists with the sale of) the product in exchange for a predetermined commission or profit (sometimes referred
to as consignment stock). A special form of this commission business is scan-based trading whereas VMI is
usually applied but not mandatory to be used.
To further define it, let’s look at 2 business models:

Under the typical business model:

When a distributor needs product, they place an order against a manufacturer. The distributor is in total control
of the timing and size of the order being placed. The distributor maintains the inventory plan.

Vendor Managed Inventory model:

The manufacturer receives electronic data (usually via EDI or the internet) that tells him the distributor’s sales
and stock levels. The manufacturer can view every item that the distributor carriers as well as true point of sale
data. The manufacturer is responsible for creating and maintaining the inventory plan. Under VMI, the
manufacturer generates the order*, not the distributor.

*Note: VMI does not change the "ownership" of inventory. It remains as it did prior to VMI.

This is one of the successful business models used by Wal-Mart and many other big box retailers. Oil
companies often use technology to manage the gasoline inventories at the service stations that they supply
(see Petrolsoft Corporation). Home Depot uses the technique with larger suppliers of manufactured goods
(i.e. Moen, Delta, RIDGID, Paulin). VMI helps foster a closer understanding between the supplier and
manufacturer by using Electronic Data Interchange formats, EDI software and statistical methodologies to
forecast and maintain correct inventory in the supply chain.
Vendors benefit from more control of displays and more contact to impart knowledge on employees; retailers
benefit from reduced risk, better store staff knowledge (which builds brand loyalty for both the vendor and the
retailer), and reduced display maintenance outlays

Consumers benefit from knowledgeable store staff who are in frequent and familiar contact with manufacturer
(vendor) representatives when parts or service are required, store staff with good knowledge of most product
lines offered by the entire range of vendors and therefore the ability to help the customer choose amongst
competing products for items most suited to them, manufacturer-direct selection and service support being
offered by the store.

Scan-bases trading:

Scan-based trading (SBT) or Scan based trading is the process where suppliers maintain ownership of
inventory within retailers' warehouses or stores until items are scanned at the point of sale.

Consignment Stock :

Consignment stock is stock legally owned by one party, but held by another. Ownership of consignment stock
is passed only when the stock is used (issued). Unused stock in a warehouse may be returned to
the manufacturer. As ownership of consignment stock is not transferred until use, invoicing is not immediate.
To account for a replenishment of consignment stock at a customer site, a manufacturer must
credit inventory and debit customer consignment stock. Only after a customer actually uses the consignment
stock may an accounts payable be created.

Electronic Data Interchange

Electronic data interchange (EDI) is the structured transmission of data between organizations by electronic
means. It is used to transfer electronic documents or business data from one computer system to another
computer system, i.e. from one trading partner to another trading partner without human intervention.

It is more than mere e-mail; for instance, organizations might replace bills of lading and even cheques with
appropriate EDI messages. It also refers specifically to a family of standards.

In 1996, the National Institute of Standards and Technology defined electronic data interchange as "the
computer-to-computer interchange of strictly formatted messages that represent documents other than monetary
instruments. EDI implies a sequence of messages between two parties, either of whom may serve as originator
or recipient. The formatted data representing the documents may be transmitted from originator to recipient via
telecommunications or physically transported on electronic storage media.". It distinguishes mere electronic
communication or data exchange, specifying that "in EDI, the usual processing of received messages is by
computer only. Human intervention in the processing of a received message is typically intended only for error
conditions, for quality review, and for special situations. For example, the transmission of binary or textual data
is not EDI as defined here unless the data are treated as one or more data elements of an EDI message and are
not normally intended for human interpretation as part of online data processing." [1]
EDI can be formally defined as the transfer of structured data, by agreed message standards, from one computer
system to another without human intervention.
VMI Software
If you’re like most suppliers, you sell merchandise to many different retailers. With each retailer having its own
set of requirements and varying levels of consumer demand, it can be difficult to keep track of it all.
That’s where Vendor Managed Inventory (VMI) can help.
VMI inventory application can help any business manage its complex inventory requirements and gain insight
into consumer driven demand. You’ll be able to understand the specific requirements of each business partner
and automatically generate orders and replenish inventory. By setting inventory policy at the retailer’s location,
you’ll be able to monitor ongoing inventory levels, determine which items need to be replenished and how to
ship them cost effectively.
With Vendor Managed Inventory, your business will experience fewer stock-outs, increase inventory turns,
reduce lead times and improve trading relationships. Our VMI supply chain clients experience increased levels
of customer service from their trading partners and are more effective at building long-term relationships.

Vendor Managed Inventory (VMI) by Park City Group is a great way to manage relationships with retailers and
ensure that your inventory levels are always at optimal levels. This demand forecasting software will help in
manage trading relationships and improve customer service at the store level.
With inventory forecasting software from Park City Group, you’ll be able to:
• Manage and maintain forecasts
• Analyze or handle forecasts or inventory exceptions
• Maintain forecasts and inventory parameters set by trading partners
• Interface with trading partners regarding new products and promotions
• Prepare various performance reports and respond to problems in real time
• Perform timely order maintenance
This type of demand forecasting analysis will give you new insights into your trading relationships and help you
streamline your operations. Having access to this valuable data will help you reduce inventory, lead times and
out-of-stocks – all while improving your vendor relationships.
By having an in-depth understanding of what demand looks like at the store-level, you’ll be able to better meet
the individual needs of each of your trading partners. Our software is pre-mapped by partner so that you can
automatically generate orders, set inventory policies at the retailer’s distribution center, accurately monitor
inventory levels and much more.

Vendor Managed Inventory – Competitive Advantage?

Posted on April 26, 2010 by
Managing your inventory in an effective and efficient manner is a goal that many businesses continue to strive for.
One such idea that has been developed and is now in full use is the vendor managed inventory (VMI) system, which
if implemented correctly can drive distinct competitive advantage.

Without further ado then, let’s look at how VMI has evolved, its business advantages and how it could play an
important part in an effective inventory optimisation program.

The History of Vendor Management Inventory

Historically, FMCG companies, retailers or manufacturers would watch their inventories dwindle and when the
inventory was close to being completely gone, the company would order more. This led to a lot of stock out costs;
defined as the lost revenue a company faces because it is unable to fill customer orders.
Some organisations evolved though and began guessing when their inventory levels were going to run low
and ordered more just in case. The really smart companies started tracking their inventory sales and looked for
patterns and trends. They developed an overall inventory system with certain reorder points. At these points the
retailers would automatically send an order to suppliers and hope that they had enough to meet demand.

Even with these new processes, companies were still experiencing stock-outs, leading to unhappy customers and
missed sales. To counter this, these organisations decided to keep an excess of inventory on hand, usually in the
back of the store. This kept customers happy, but it led to incredibly high inventory costs. As if the pendulum had
swung too far one way, the idea of just-in-time inventory (JIT) was developed. This would drastically cut inventory
costs and the idea was to always have stock on hand when needed.

JIT was superb for most companies, but it kept suppliers hopping. Trading partners were never sure when retailers
were going to order; so it was the suppliers who had to keep excess inventory on hand.

As with many supply chain management initiatives, a little communication goes a long way. Let’s take for example
smart retailers who decided to start sharing information with suppliers so trading partners would stay happy and
have a better idea when to start producing goods for the retailers. Retailers and suppliers formed such strong
relationships that soon the retailers realised that their trading partners could have the information and decide when
to ship the goods so that there wouldn’t be stock-outs. The advent of electronic data interchange (EDI), made
sharing information much easier.
Vendor managed inventory was born; retailers had successfully shifted the burden of reordering to the
manufacturers. Manufacturers are happy because they know when and what they need to produce and they have a
stream of guaranteed sales. Retailers are happy because inventory carrying costs are low as well as stock-out costs
(it turns out that manufacturers are really good at keeping inventory at the right levels).

Competitive Advantages of Vendor Managed Inventory

A VMI system shifts a lot of the work away from the retailer or manufacturer to the supplier. This frees up resources
for retailers, allowing them to focus on their core competencies.The supplier usually signs a long-term deal with the
distributor. This can be extremely nice for the supplier, as it essentially smoothes out income and helps guarantee
long-term success. If you don’t believe me, think about how hard suppliers compete to for a vendor managed
inventory contract with Wal-Mart.

Therefore, it won’t come as a shock to learn that retailers don’t work with as many suppliers in this way. A retailer
doesn’t want to share its information with everyone so it usually only chooses a few trusted suppliers to provide
them vendor managed inventories. This simplifies the organisation; although it can be a problem if one of the
vendors suddenly goes out of business.

Downsides of VMI
Vendor managed inventory is not a one size fits all solution. It has a few potential pitfalls that can be avoided.
Communication, communication, communication is the key as retailers and their suppliers have to be constantly
sharing information. If they don’t, then a VMI system will not work.

VMI can be expensive to setup in the early stages. First of all you have to pick out a few trusted suppliers. You
may want to audit the supplier to make sure they can meet your company’s demands. Next you have to get some
form of B2B messaging system going with the supplier. Finally you have to train everyone how to use the system.
You are sharing your information with a third party. Your company’s competitive advantage may be shared with the
manufacturer. Does the manufacturer safeguard that information as well as your company? Will the manufacturer
decide that it could just as easily be a retailer and become a new competitor?
Vendor Managed Inventory Software
A retailer and its suppliers will need some form of software to manage its new VMI system. This software can be
really expensive, although companies like Perceptant have pre-packaged VMI solutions available via SaaS, which
dramatically reduce any upfront investment and ongoing running costs.
In addition, each retailer, manufacturer and FMCG company is different so typically, VMI software companies have
to customize the software for almost each trading community and business partnership.