What is Vendor Managed Inventory?

OEMs today are striving to keep up with increased market demands while trying to figure out ways to keep costs and inventory down.  In response to the pressure, some manufactures find themselves implementing internal processes where they see short term gains, only for them to end up spending more time putting out fires in the long run.  Other manufactures simply don’t know what to do.

VMI is a solution to the issues that are faced by OEMs. By implementing a VMI program, the right products are always available at the right time. A VMI supplier provides continuous part replenishment, reduces overstock, and eliminates non-value added activities, making a VMI program an essential element to any company’s supply chain program.


What is VMI?

Vendor managed inventory (VMI) is a practice in which a supplier takes full responsibility for managing a buyer’s inventory at that buyer’s location.

With the right tools it is easier for a supplier to effectively manage inventory than for buyers to try and manage hundreds or thousands of part numbers on their own.

What are the typical reasons for a company to consider implementing a VMI program?

The objectives of VMI programs include:

  • Ensuring the availability of quality parts. The system needs to address the issues that cause availability problems by managing the inventory in the supply chain. Having parts is of no value if they do not meet the quality requirements so the system must address that and, in most cases, eliminate the need for incoming inspection at the customer site
  • Reduce or eliminate non-value added activities. A good VMI system lowers the costs of procurement by making major changes in the time required to manage the process and the cost of inventory

The best VMI systems go beyond these basics and add:

  • Actively pursue cost reduction opportunities. These can be in the procurement process or in reviewing the application of the parts from a technical perspective. Because much less time is spent on the procurement process there is more time for proactive cost reduction
  • Use data to manage the system. In too many cases VMI programs are implemented and work well for a period of time but as requirements, business conditions, designs, and other things change, the system does not make the required changes. The best systems have built in reviews that address these changes on an ongoing basis


What are the characteristics of a great VMI system?

  • Customized to meet the specific needs of each customer
  • Uses data to analyze consumption patterns and adjust inventory levels as a result
  • Minimizes transaction processing costs while improving information accuracy
  • Places appropriate responsibility for inventory with the customer and supplier with a written agreement that documents those expectations
  • Includes agreed upon performance metrics and a reporting system to regularly review performance
  • Provides proper checks and balances to ensure proper accounting controls but relies in a relationship based on trust to minimize auditing costs
  • Encourages ongoing cost reduction efforts by incenting each party to actively identify and implement cost reduction suggestions
  • Includes plans for a seamless transition to VMI. No matter how good the VMI system is, if it starts out with problems, it will probably fail in the future from lack of support
  • Senior management support at the supplier and customer is critical. New ways of doing things will affect all areas requiring top level support


What type of parts should I consider for my VMI system?

Many types of parts lend themselves to VMI programs. Some of the characteristics of good candidates include:

  • Medium to high volume parts that require significant ordering, order management and procurement time
  • Parts with frequent shortages
  • Parts that can be certified for “dock to stock” minimizing or eliminating incoming inspection

Characteristics of parts that do not work well in VMI programs:

  • Very sporadic usage: Months with no usage and then 50% of the annual usage in a short time
  • Consistent quality issues. These issues need to be corrected before starting VMI


What types of VMI programs are there?

There are several types of VMI programs out there. The best suppliers do not believe in a uniform system for each customer.  Processes are different across different industries, each requiring a different approach.  What works for a customer at one plant may not be the right fit at another location. The best systems are the ones that are tailored to meet the customer needs. When designing a VMI system many factors need to be considered including the number of parts in the system, inventory, quality requirements, material handling, storage and many others. A supplier should be committed to making sure that their customers have a system in place that is right for them.

Here is a quick run-down of some common types of VMI systems:vmi_binStocking

Bin Stocking: Using a Barcode scanner, a VMI rep visually audits the inventory in each bin and creates real-time orders for the items that are below their minimum quantity.

In-Plant Store– The In-Plant Store system is ideal when part volume warrants replenishment several times per week. In many cases, the supplier provides the VMI services with a Team Member in the facility who may also serve as the Account Manager, managing the inventory in house and in the supply chain.

Point of use– this system is for manufactures who prefer to maintain inventory as close to the point at which it’s used as possible. This promotes greater efficiency, as inventory is readily at an assembly station when it’s needed. It is important to properly size the bins to minimize the cost of replenishing bins too frequently.

Kanban– this system supplies components, parts, and supplies to specific locations based on a pull signal.  Kanbans are visual cues that authorize the replenishment of inventory at a specified location in a pull environment. Whenever a piece of Kanban inventory is consumed, a replenishment action is trigged.

EDI– Electronic Data Interchange is a ‘system to system’ method of managing inventory in which all actions are carried out automatically, not requiring employees to be directly involved. Strict parameters are entered into the customer system, which then syncs with the suppliers information and provides a flawless method of replenishment without involving hours of labor.

Consignment– The supplier holds inventory at the customer location and retains ownership of the inventory until the inventory is moved out of consignment which triggers payment. This is useful for manufacturers where the desired inventory turns cannot be realized using other methods.

Camera– A stocking location is set up within view of an installed camera. The supplier monitors the stock remotely and orders parts/adjusts stocking levels as necessary.

And More: Innovative approaches to VMI are being developed on an ongoing basis. If the approaches currently in use do not meet the customer’s objective, the best suppliers will develop new approaches to meet customer needs.


How do VMI programs benefit the customers?

1. Improved Inventory Management

Lower inventory levels and procurement costs of which can amount to significant savings. The best systems use data to monitor usage and ensure proper inventory levels to maximize availability and minimize costs and obsolescence.

2. Reduced Administrative time and costs

Procurement personnel spend less time managing the class ‘C’ commodities so they can spend more time on commodities that can have a greater overall impact. The supplier manages the ‘C’ commodities; the customer manages the, Class ‘A’ or ‘B’ items.

3. Stronger Supplier Relationship

The supplier should collaborate with the customer to develop a stronger partnership which leads to better management of the VMI program. Since the system is actively managed using data to control inventory, the supplier spends time managing the relationship, cost reduction projects and other initiatives rather than fighting fires

Improved overall efficiency. Having good parts, in the right quantity, at the right place, at the right time makes everyone’s job easier and more efficient. The system addresses the changing requirements allowing the team to focus on issues of greater impact on the business.


Why do suppliers like VMI programs? 

1. Improved Production Schedules

With the VMI system, the distributor will monitor production fluctuations by using the data gathered from scanning the bins. The distributor can compare  historical consumption patterns and give this forecast to their suppliers giving them a more accurate production schedule

2. Improved Inventory Levels

Rather than having inventory at the customer, supplier, and throughout the supply chain, the system monitors and manages the levels and adjusts based on consumption patterns and forecast information available through the system. Suppliers have improved usage information allowing them to schedule their operations more efficiently

3. Stronger Supplier/Distributor Relationship

Communication with suppliers is key to building a long lasting relationship. The relationship with suppliers mirrors the relationship with the customer; long term focused on quality and value, great VMI suppliers conduct business reviews throughout the year for each of their parts suppliers, and provides feedback to those suppliers regarding their performance.

If you have questions regarding VMI and the benefits of implementing a program feel free to reach out to our team. With 25 years of experience managing VMI, our team of experts will be able to answer all your questions.  To contact a Field VMI expert:  email info@fieldfastener.com or call 815-637-9002.