- Vendor management inventory (VMI) systems help retailers to avoid stockouts. A recent literature review that analyzed several studies focusing on the effectiveness of VMI systems revealed that they reduced stockouts by 31% on average.
- On average, VMI reduces inventory levels by approximately 7%. In addition, VMI reduces inventory variability by about 9%.
- Examples of companies that use vendor-managed inventory systems are Walmart and Yamaha Electronics Manufacturing.
Three benefits of vendor-managed inventory systems are reduced stockouts, reduced inventory levels, and demand forecasting. Let’s take a deeper look at why it’s beneficial to utilize vendor-managed inventory systems.
Vendor-Managed Inventory Systems
Vendor management inventory (VMI) systems help retailers to avoid stock-outs. A recent literature review that analyzed several studies focusing on the effectiveness of VMI systems revealed that they reduced stock-outs by 31% on average.
According to Retail Dive, stock-outs cost retailers about $1 trillion annually. Furthermore, it is noteworthy that “reducing stock-outs and overstocks can decrease overall inventory costs by up to 10%.”
Statistics show that approximately 34% of businesses have accidentally sold items that were out of stock resulting in late orders. VMI systems ensure that stock is optimized, which increases sales. The availability of products improves customer service quality and improves brand loyalty.
VMI systems share data between product buyers and vendors to achieve better accuracy. With visibility on stock levels, suppliers can ensure that stock is replenished on time by scheduling production.
The consistent replenishment of stock that is achieved through VMI systems also eliminates random and periodic ordering. Vendors will be in a position to know how to balance lead time and demand.
Reduced Inventory Levels
The use of VMI ensures that the vendor eliminates the need for buyers to have safety stock, which leads to lower inventory levels.
VMI systems enable vendors to have visibility of their customers’ inventory levels. Visibility of inventory levels is possible since vendors can access “a customer’s point of sale (POS) data.”
Lower inventory levels mean that businesses can save operational costs in storage, shipping, and maintenance. In addition, VMI systems reduce the need for safety stock, which can result in additional costs and waste that can have a negative effect on profits.
Other benefits of inventory reductions that can be achieved through VMI systems include lower insurance costs due to reduced risk of loss, and less spoilage and out-of-date products. Furthermore, lower inventory reduces the amount of labor need for tracking and verification and better quality products.
VMI systems help in forecasting the demand for products that require manufacturing, assembling, and shipping. In addition, VMI helps to identify non-performing stock-keeping units.
Demand forecasting helps vendors to make calculations on replenishment and reordering. Forecasting can be achieved since VMI systems have visibility into the stock level and sales patterns. Therefore, vendors can anticipate customer orders and inventory needs.
A VMI system helps vendors to plan for demand peaks adequately especially during sales periods such as Christmas and Black Friday.
Planning for these peaks will ensure that there is adequate stock in place, which reduces lead times that can be caused by unexpected spikes due to positive media coverage.
The use of VMI for demand forecasting ensures minimal disruptions in the supply chain because lead time is reduced. According to Supply Chain Academy, “cutting the order-to-delivery time in half can reduce the bullwhip effect by as much as 80%.”
An Example of VMI
Yamaha Electronics Manufacturing (YEM) is a global leader in manufacturing and trading consumer video products, video service parts, and audio. The company’s manufacturing plant is located in Perak, Malaysia.
YEM maintains more than 20,000 raw materials and, therefore, needs to ensure that there is adequate warehouse inventory to maintain operations by having safety stock. Consequently, the company experienced challenges, such as increased inventory holding costs, limited cash flow to purchase extra stock, and challenges in maintaining inventory visibility.
The company also had frequent revisions and changes in purchase and delivery orders issued by suppliers because of fluctuating demand.
To deal with the challenges it experienced, R Systems was tasked to implement a vendor management inventory system.
After implementing a VMI system, YEM’s inventory costs went down by RM4 million. In addition, “suppliers fill rates improved 90% and above, the production cycle lead time reduced to 3 weeks from 7 weeks, and suppliers’ delivery lead time reduced from 6 weeks to 2 weeks.”
Moreover, there was a reduction in holding time for inventory from three weeks to one week, supplier’s delivery cost went down by 50%, and the days of supplying inventory went down from 10 to 7 working days.
SOLUTIONS TO MANAGE YOUR INVENTORY
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