How to Implement a VMI Programme

A vendor-managed inventory process (VMI) – an arrangement in which a supplier manages the buyer’s inventory – has advantages for both the vendor of the product and the buyer or retailer that relies on the stock. VMI benefits include a reduced need for the buyer to hold components and a lower chance of running out of inventory. The vendor benefits from better visibility of demand for products and components.

Implementing a vendor-managed inventory process requires the sharing of accurate data between the vendor or supplier and the buyer. Real-time sales and inventory data is needed, which can be technologically complex to access. The vendor must monitor stock levels, demand, and forecasts, and deliver fresh stock before they run out. This is a process that requires considerable trust on both sides.

Is VMI right for your facility? It depends on several factors. VMI works well if demand is relatively predictable, volumes of product are high, and the relationship between the buyer and the supplier is strong. It’s vital that data can be shared between the two organisations promptly. A supplier should be able to integrate its systems, such as enterprise resource planning (ERP) and forecasting tools, with the buyer’s platforms.

VMI may be beneficial if you frequently find you run out of stock and would like it to be replenished automatically. It’s also useful in cases where buyers or retailers find they have too much cash tied up in managing inventory.

On the other hand, businesses that have poor data about stock or find it difficult to forecast demand may struggle to realise the benefits of VMI. Additionally, while it is a good system for buyers dealing with large volumes of components on repeat orders, it doesn’t work so well at smaller, more specialised companies with a lot of bespoke requirements.

In summary, when assessing whether VMI is right for you, think about:

• The size of your organisation
• Whether you have access to accurate forecasting and stock data
• If demand is relatively predictable
• If you have a strong relationship with the vendor

It’s worth remembering that VMI helps consolidate the supply chain. This drives operational and purchasing efficiencies, such as reductions in walk and wait time and documentation (the number of purchase orders and invoices you must process, for example). 

Some of the pitfalls in VMI relationships (see below) can be avoided by selecting the correct suppliers and products at the start of the process. 

If you work with RS, we start by conducting a deep discovery process to understand purchase-to-pay processes, challenges and goals. We identify the right solution and create a service design to solve challenges identified in discovery.

It’s unlikely that every single supplier of your company would benefit from being included in VMI. Pick suppliers who supply large volumes of components or products regularly, where the financial value is high. They are likely to be organisations you are already in long-term contractual relationships with and that collaborate closely with you.

The suppliers you choose should have forecasting expertise, strong production planning and scheduling capability, a track record of delivering orders on time and in full, and the ability to integrate ERP or their electronic data interchange (EDI) capability with your own systems. It also helps if the supplier is financially stable and has enough capacity to deliver your order in the event of a surge in demand. The order should not be put at risk because the supplier has a customer that it prioritises over you.

When it comes to selecting the right SKUs for VMI, choose products or components that are high-value and for which large volumes are required. (A simple programmable logic device might be an example.) Some medium-volume products may also benefit from VMI, but many low-value, low-volume products won’t benefit from inclusion in the system.

Remember that VMI works best with:

• Regular repetitive demand
• High volumes and values
• Products where stock typically runs out

Supplier inventory management systems, such as VMI, are only as good as the data they process. Data that is typically visible includes inventory levels, sales and consumption data, lead times, purchase order numbers, and so on. Establishing data connectivity may involve integrating the buyer’s ERP system with the supplier or vendor’s ERP. RS always works not just with the products to be managed but also their associated data (if available), identified to create a tailored solution. 

Application programming interfaces may be required so that systems at each organisation can talk to each other. Ultimately, the goal is for real-time visibility of inventory and where it is in the supply chain, along with accurate forecasting of sales and demand. Good visibility prevents both running out of a product and unnecessarily replenishing supplies.

TIP: If you don’t have complete visibility of your stock, then it’s wise to correct this before implementing VMI.

If you want to avoid running out of stock (or ending up with too much), you need to set minimum and maximum levels. When the minimum level is reached, it triggers resupply. When the maximum level is hit, stocks are fully replenished. This ‘replenishment logic’ is at the heart of successful VMI programmes. 

Along with establishing commercial terms, RS always determines replenishment logic. We also conduct pre-implementation checks (such as assessing mobile reception on site and the space available) and kick-off sessions.

Sound replenishment logic:

• Reduces or eliminates incidents where stock runs out
• Stops companies holding inventory they don’t need
• Keeps manufacturing stable
• Improves cash flow

The minimum level (trigger for stock replenishment) is determined by calculating the average demand for a product each day, multiplying it by the lead time for delivery, and adding the level of safety stock (safety stock is inventory that is held as a precaution in the event of unexpected changes).

For example, if your average daily demand is 500 units, the lead time is five days, and you have a safety stock of 300 units, the calculation for the minimum level would be: (500 x 5) + 300 = 2,800. When a stock level of 2,800 units is reached, it would be the trigger for the vendor to replenish supply.

The maximum level (trigger to stop replenishment) is calculated by adding the minimum level to the average demand multiplied by a review period. In the example above, if the review period was seven days, the calculation would be: 2,800 + (500 x 7) = 6,300 units. At this point, inventory would be regarded as fully replenished, and no new inventory would be added. 

RS will always work to support customers in the early phase of VMI once physical implementation has taken place. We will also support during business as usual and ensure benefits are being realised. 

Some common difficulties can adversely impact a VMI relationship. Some typical pitfalls include:

• A lack of clear and accurate data
• Breakdowns in trust between vendor and buyer
• Selecting the wrong SKUs at the start
• Picking an unsuitable supplier for VMI
• Failing to take account of product lead times
• Failing to take account of variations in demand
• Not tracking performance data
• Trying to do too much, too quickly

These pitfalls can be avoided if you work with a leading supplier such as RS. Our inventory management solutions help to streamline processes and improve productivity. Using real-time data, they enable reduced carrying costs, correct holding of stock, and increased accuracy. 

Our solutions include RS ScanStock®, an open issue solution allowing users to quickly grab what they need, and RS VendStock®, an industrial vending solution ideal for PPE and higher value tools. Finally, RS ControlStock® offers controlled access in satellite stores.

Our inventory solutions reduce the time spent managing inventory by 60%. They enable zero stock-outs and reduce consumption. 

Glossary

Want to learn more about inventory management? There is loads to discover with RS.