Vendor-Managed Inventory, Is It Practically Good for Industries?

12 Aug 2024

Articles

Vendor-Managed Inventory, Is It Practically Good for Industries?
By Reinaldo Ragil Rompas

Vendor-Managed Inventory (VMI) is a structure in which suppliers control predetermined inventory levels. In summary, the supplier makes choices on behalf of the store and constantly replaces the inventory. VMI, also known as controlled inventory, is a data-driven system with advanced software for procurement that allows vendors to schedule shipment and manufacturing dates ahead of time to reduce stock-out concerns.

The vendor-managed inventory process consists of numerous steps, including:

1. Company Agreement with Vendor

The first step in the vendor-managed inventory process is to reach a deal between the company and the supplier or vendor through offering the list of items to be bought, an obligation to the number of goods to be purchased within a specific time frame, and the mutually agreed-upon prices.

2. Creation of Purchase Orders

The next step in vendor-managed inventory is to make the different agreements listed above and document them as purchase orders. Following then, the supplier or vendor will deliver the initial goods in accordance with the agreement. Later in the bookkeeping process, the supplier or vendor will issue a purchase receipt without the company’s approval.

3. Company Bill Payment

The company must complete the last stage of the vendor-managed inventory process by paying the bill in accordance with the invoice produced by the supplier or vendor and the quantity of various deliveries performed. The nominal will be indicated in the purchase order because the vendor will supply items many times based on the amount of inventory tracked in the firm information system.

Retailers and suppliers must agree on criteria or key performance indicators (KPIs) that will allow both sides to make mutually advantageous stock selections.

Certain inventory management KPIs that are usually component of a VMI agreement include:

Inventory Turnover Rate: The number of times a whole inventory is sold in an amount of time (e.g., one year), also referred to as inventory turns.
Stock-to-Sales Ratio: The ratio of inventory in storage to total sales.
Sell-Through Rate: The ratio of inventory units sold to those number received.
Backorder Rate: The number of orders that were delayed (orders that the company is unable to complete) as a percentage of all orders placed.
Supplier Quality Index (SQI): An overall metric that measures the supplier’s competence in relation of goods quality, corrective action, delivery quality, and so on.

The VMI technique is most effective for shops who (re)sell a wide range of products from a variety of vendors. When several vendors take part, retailers find it difficult to handle the new stock that arrives from each of them. The load is reduced by distributing inventory management responsibilities among multiple vendors. It also allows vendors to proactively and swiftly restock the retailer’s stock, driving their own continual sales and revenue.

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