Vendor Managed Inventory Benefits for Suppliers
Many suppliers enter into Vendor Managed Inventory (VMI) as a strategic initiative to build stronger customer relationships. Others do it as part of their move to a lean, demand-driven supply chain. Often suppliers find that the quickest benefit is increased sales.
Many of the leading retailers expect a large supplier like Henkel to offer VMI capabilities. It’s an important aspect of our customer relationship, giving us the ability to ensure high service levels in their DCs so they can provide high shelf availability at the store level. That’s how we work jointly to maximize sales.
Tracee Abu Manager Customer Supply Chain, Henkel
We are able to manage three times more business with our suppliers doing VMI that with our non-VMI suppliers.
Steve McEnany Assistant VP of Marketing and eCommerce, Midwest Wheel
VMI changes the level of trust between supplier and distributor. We become closer to our customers.
Tim Bauer Operations Project Manager, Meritor
Sales increases in the 5%-25% are not uncommon in a new Vendor Managed Inventory (VMI) relationship.
Factors contributing to sales increases of products already carried by the customer are likely due to fewer stock-outs and/or improved product mix based on better demand visibility.
Market share increases are experienced when the customer increases the number of SKUs carried because they are realizing higher profitability, lower costs and/or better service with the supplier's products. Another explanation for market share increases is that the customer shifts purchases to larger suppliers offering more comprehensive, value-added programs like VMI.
Continued sales growth is attributed to better collaborative planning for promotions, new product introductions (NPI) and exceptional demand, such as project work, enabling the supplier to take better advantage of special sales opportunities.
Reduced Operating Costs
Even though the supplier takes on the responsibility for replenishment in a VMI relationship, operating cost savings alone can easily offset the costs of doing VMI.
Vendor Managed Inventory (VMI) programs result in reduced administrative and operating costs due to fewer order problems caused by bad data, fewer emergency orders due to stock-outs, a more consistent order process which typically lowers total order count by 4% - 6%, fewer returns of "dead" inventory created by lack of collaboration on product replacements and reduced transportation costs due to fewer emergency orders and the ability to recognize order consolidation opportunities.
Additionally, suppliers with mature VMI programs often experience reduced finished goods inventory requirements due to reduced demand variability, better forecasts and better information for Sales & Operations Planning (S&OP). Orders aligned with actual demand helps to reduce the bullwhip effect. Earlier visibility of exceptional demand aids in planning leveled production. Sales and Product Management benefit from immediate visibility
- Better visibility of 'normal' demand due to frequent orders aligned with actual demand (this helps reduce the bullwhip effect).
- Earlier visibility of exceptional demand due to better communication with customers about upcoming special activity, such as project work, local promotions, etc. (this helps in planning leveled production).
- Immediate visibility of actual demand in early days of New Product Introduction (NPI).
Note: Strategic operating cost savings are one of the biggest potential benefits of VMI once a substantial portion of business for particular items or item groups is done through VMI
Stronger Customer Relationships
VMI is one of the best tools available to suppliers for building stronger customer relationships. Close customer relationships help to reduce the cost of sales while at the same time helping to protect and grow market share. In particular, VMI helps a supplier:
- Achieve “Preferred Supplier’ status by providing bottom line benefits and being ‘easy to do business with’.
- Achieve ‘Strategic Partner’ status by providing the customer with insights about operational/P&L issues.