Vendor management inventory (VMI) is a practice for managing inventory in which the supplier of goods, generally the manufacturer, is the one who manages the optimization of the inventory held by a distributor.
When it comes to VMI, you share your inventory data with the vendor or supplier since the vendor is the one making the decisions who determines the order size, while in traditional inventory management, you make your own decisions with regard to the order size.
Demand forecasting is utilized to predict what customer demand will be for an item or service, with different levels of specificity. Accurate, timely forecasts are precious for both businesses as well as their customers. There are many different ways, both quantitative and qualitative, for creating and enhancing forecasts.
How Vendor-Managed Inventory Works in Retail
VMI works by leveraging a couple of important elements.
Sharing Info
You share the needed data with the supplier, such as the data on sales, forecasts, and inventory levels, through electronic data interchange (EDI) or another automated system.
Monitoring Inventory
The supplier utilizes all the data to monitor your real-time levels of inventory. They could track sales trends, recognize potential stockouts, and fine-tune replenishment orders as needed.
Replenishment
The supplier in a vendor-managed inventory is responsible for the restocking and replenishment of your inventory, making sure there is always a sufficient amount of products to meet demand. They could use different methods for replenishment that are driven by demand, like regular deliveries, consignment inventory, or just-in-time (JIT) deliveries.
Performance Measurement
You and the supplier need to agree on metrics for performance, such as inventory turnover, cost savings, and service levels. You need to regularly check these metrics to monitor the success of the VMI program and identify areas for improvement.
Benefits of Using VMI for Demand Forecasting
Increased Accuracy in Forecasting
The underlying data determines how good the demand forecasts are. Accurate information is a must to make sure precise forecasting is achieved to prevent stockouts and unhappy buyers. A VMI system’s modern reporting capabilities give high-quality and accurate demand forecasts.
Enhanced Inventory Management
A good VMI system makes demand forecasting easier and determines the right time to order more of each product, minimizing the seller’s needed storage space. Because the vendor monitors the inventory, VMI also lessens unnecessary ordering. Every one of these changes lead to inventory management being optimized .
Best Practices for Implementing VMI in Retail
Share The Details With The Vendor
Your vendor is not a mind reader and won’t find out what’s going on with your stock levels on their own. That’s why sharing with them the information and the data of the inventory for as long as your VMI partnership lasts is important.
Keep Vendors Updated On Seasonality
Almost every product-based company will encounter fluctuations in demand in relation to seasonality (maybe even outside the holiday season). If you rely on VMI, it’s essential to keep your suppliers updated on your predicted sudden rise in sales so they can prepare to operate through this influx and ensure running out of stock is never an issue..
Update Vendors With Any Sudden Changes In Demand
Aside from keeping vendors updated on your products’ seasonality, you need to let them know as well when demand goes in another direction. Let’s say your sales all of a sudden drop off, or a specific item quickly loses its attraction. In that case, you must inform your vendor of these fluctuations so excess goods won’t be delivered and an overstock situation can be avoided.
Straightforward Fees Negotiation
Negotiating fees straightforwardly just makes sense business-wise, and partnering with a supplier (through VMI) is not an exception. When talking about the costs before transitioning to a formal vendor deal, you won’t encounter unwanted surprises in the long run. But if you run into sudden fees, you could refer to your first negotiations to help clear things up. It’s important to incorporate these written terms into the finished vendor contract to ensure accountability and clarity for both parties.
Set Up Specific Goals For Your Business
If VMI is something you’re going for, take the time to cement certain goals and expectations that you’d like to meet. Doing so will give a better image of what the ideal supplier partnership looks like in your eyes and could help you have an idea of whether the vendor is keeping their end of the deal (or whether you should take your business elsewhere).
Elevate Retail Success with VMI
Vendor-managed inventory (VMI) improves the accuracy of retail demand forecasting, optimizes inventory management, and strengthens vendor relationships. Retailers can improve efficiency, cut costs and keep a fluid supply chain for continued growth through information sharing, on-demand changes for suppliers and upfront fee negotiation and goal setting.
