In the past 10 years there has been a lot of buzz about how to manage your inventory in an effective and efficient manner so as to beat out the competition. One of the ideas that has been developed and is now in full use is the vendor managed inventory system. This article will attempt to shed light on the matter and will provide the reader with some excellent tidbits that just might give you an edge in today’s competitive business world.
The Evolution of Vendor Management Inventory
In the old days, retailers or shopkeepers would watch their inventories dwindle and when the inventory was close to being completely gone, the retailer 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.
Smart retailers evolved from this stage and started ordering more goods when they had a hunch that their inventory was low and they thought more would be needed. The really smart storekeepers 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 vendors and hope that they had enough to meet demand.
Some retailers were still having stock-outs and this leads to unhappy customers. These retailers 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 was developed. This would drastically cut inventory costs and the idea was to always have stock on hand when needed.
Just-in-time was superb for most shopkeepers, but it kept vendors hopping. Vendors were never sure when retailers were going to order; so it was the suppliers who had to keep excess inventory on hand.
As with a lot of things in life, a little communication goes a long way. Smart retailers decided to start sharing information with vendors so the vendors would stay happy and have a better idea when to start producing goods for the retailers. Retailers and vendors formed such strong relationships that soon the retailers realized that the vendors could have the information and decide when to ship the goods so that there wouldn’t be stock-outs. The invent of electronic data interchange, EDI, made sharing information much easier.
Vendor inventory management 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).
Benefits of a Vendor Managed Inventory
As mentioned above, a VMI system shifts a lot of the work away from the retailer to the manufacturer. This frees up resources for retailers, allowing them to focus on their core competencies.
The manufacturer usually signs a long-term deal with the distributor. This can be extremely nice for the manufacturer, as it essentially smoothes out income and helps guarantee long-term success. If you don’t believe me, think about how hard manufacturers compete to for a vendor managed inventory contract with Wal-Mart.
Retailers don’t work with as many manufacturers. A retailer doesn’t want to share its information with everyone so it usually only chooses a few trusted manufacturers to provide them vendor managed inventories. This simplifies the organization; although it can be a problem if one of the vendors suddenly goes out of business.
Potential Disadvantages of VMI
Vendor inventory management is not a one-step fix all. It has a few potential pitfalls that can be avoided.
Communication, communication, communication. The retailer and the manufacturer have to be constantly sharing information. If they are not, then a VMI system will not work.
VMI is expensive to setup in the beginning stages. First of all you have to pick out a few trusted suppliers. You may way to audit the supplier to make sure they can meet your company’s demands. Next you have to get some form of electronic data interchange 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 will need some form of software to manage its new VMI system. This software can be really expensive, and unfortunately there aren’t any boxed and ready-to-go options. This is largely because each retailer and manufacturer is different so the VMI software companies have to customize the software for almost each individual company.
