Vendor Managed Inventory (VMI) – A collaborative Supply Chain Concept

As the name suggests, VMI stands for Vendor Managed Inventory. VMI involves a collaborative and continuous inventory supply owned, managed and replenished by the Manufacturer right up to the last stocking point or point of sale to end customer.

VMI concept is widely being used by companies both as procurement business model and FG supply chain model too. Industries like retail supermarkets, consumable supplier industry, electronic hardware industry and Automotive Components industries have adopted these strategies effectively to improve their supply chain efficiencies.

VMI concept aims to reduce inventory in the pipeline, besides achieving the concept of JIT - Just in time wherein the ownership of the inventory lies with the supplier until the time of usage or sale where it gets transferred to the buyer. This model also reduces operational costs of logistics and inventory management for the buyer.

VMI’s success depends upon several factors. First of the entire concept predetermines the existence of a strategic partnership and alliance between the supplier and the distributor as well as the logistics service partners.

On the part of the supplier, a participative approach to growing the relationship by investing into enhancing value for the customer and extending customer relationship management initiative drives such an approach, wherein the supplier agrees to own the inventory until the point of call off and continues to monitor and manage the inventory besides ensuring replenishments.

The customer being distributor or manufacturing plant, in this case, appreciates the supplier initiative and take interest in coordinating and cooperating with supplier and supervise at times the 3PL who is situated at his premise or a nearby location.

In the case of Raw Material supplies and OE Supplies to Manufacturing plants, the VMI programs are driven by the procurement logistics team of the plants.

The VMI warehouses are operated upon by a designated 3PL within the plant premises or at a nearby location. In such cases, though the inventory belongs to the supplier and the cost of operations are paid for by the supplier, the procurement logistics team of the plant continues to monitor, supervise and manage the 3PL service provider as the suppliers do not have visibility or effective control over 3PL at such remote locations.

The role of a competent 3PL Warehousing Partner is very critical to the success of a VMI in a manufacturing plant setup.

Normally a lead logistics player is selected by the Buyer Company and given the responsibility to handle the transportation logistics from the place of origin, provides destination services like customs clearance, domestic transportation and after that setup and manage warehousing operations and JIT supplies to the plants.

The buyer organization would have a panel of buyers enrolled into the VMI program and can include multiple suppliers supplying similar materials and products. The 3PL would act as a warehouse provider for all the companies, manage the inventories of different suppliers in its WMS system and supply such materials as per the call off list provided by the buyer.

A VMI model as practiced in retail supermarkets is similar conceptually to the model as in Manufacturing setup, but the role of 3PL would not be as important or relevant it may not call for huge inventory management operations to be set up at the retail store.

Though the purchasing and consumption decisions are taken by the buyer and accordingly trigger for stock release takes place from VMI bins, the supplier actively monitors the inventory usage and operates replenishment cycle, plans the shipment modes, delivery and takes ownership of ensuring agreed inventory fill rates and service performance.