Vendor-Managed Inventory (VMI) is a powerful supply chain strategy that shifts the responsibility for inventory management from the customer to the supplier. This approach ensures optimized stock levels, reduced carrying costs, and improved service levels through a collaborative relationship between retailers and suppliers.
Defining Vendor-Managed Inventory (VMI)
According to SCOR Best Practice BP.122, VMI allows suppliers to access customer inventory data and take responsibility for replenishment. This is done through regular stock reviews, inventory counting, removal of outdated or damaged goods, and restocking to predefined levels. The process ensures seamless supply chain operations, often referred to as continuous replenishment.
Key SCOR DS Processes in VMI
VMI relies on structured processes to ensure efficient inventory management and supply chain collaboration:
- Network Design (OE7) – Ensuring VMI is structured effectively within the supply chain.
- Regulatory Compliance (OE8.1 – OE8.3) – Monitoring and assessing compliance requirements.
- Segmentation (OE12) – Classifying inventory to tailor VMI strategies.
- Supply Chain Planning (P1 – P5) – Integrating VMI with demand planning, sourcing, transformation, and fulfillment.
- Order Management & Scheduling (S2.1 – S3.2) – Establishing automated order signals and scheduling deliveries.
- Returns Management (S4.1) – Handling the return of excess or defective inventory.
- Fulfillment Strategies (F1 – F3) – Addressing B2C, B2B, and intra-company fulfillment requirements.
Metrics for Measuring VMI Success
Key performance indicators (KPIs) for VMI include:
- Perfect Supplier Order Fulfillment (RL.1.2) – Ensuring orders are delivered accurately and on time.
- Sustainability Metrics:
- Materials & Energy Usage (EV.1.1 – EV.2.5) – Tracking material consumption, energy use, and water management.
- GHG Emissions (EV.2.7 – EV.2.9) – Measuring Scope 1, 2, and 3 greenhouse gas emissions.
- Waste Management (EV.2.10 – EV.2.11) – Assessing waste disposal efficiency.
The Role of People in VMI Success
Collaboration is essential for VMI success. Key competencies include:
- Supplier Relationship Management (HS.0139) – Strengthening partnerships for mutual benefit.
- Customer-Supplier Communication (HS.0032) – Ensuring transparency and information sharing.
- Warehouse Management Systems (HS.0192) – Using technology for real-time inventory tracking.
- Sourcing & Procurement (HS.0207, HS.0221) – Establishing procurement strategies and managing vendor relationships.
ECR’s Role in VMI Implementation
The Efficient Consumer Response (ECR) Community has long promoted collaborative relationships between retailers and suppliers, making VMI a natural fit within its framework. ECR emphasizes joint problem-solving and efficiency improvements through data sharing and process alignment.
- Fostering Collaboration: VMI is a direct application of ECR’s principles, ensuring mutual benefits for both suppliers and retailers.
- People Development: ECR underscores the importance of training employees to manage and optimize VMI programs.
- Strategic Integration: Retailers’ purchasing and supply chain departments must work closely with suppliers’ sales and production teams.
- Win-Win Scenario: By leveraging real-time data and predictive analytics, both parties can reduce excess inventory while maintaining product availability.
Benefits of Implementing VMI
Implementing VMI offers significant advantages:
- Improved Inventory Accuracy – Suppliers leverage real-time data for optimized stock levels.
- Reduced Stockouts and Overstocking – Continuous monitoring prevents disruptions.
- Lower Inventory Holding Costs – Optimized replenishment reduces excess storage costs.
- Stronger Supplier-Customer Collaboration – Encourages data-driven decision-making.
- Enhanced Sustainability – Aligning inventory management with environmental responsibility.
Conclusion
VMI is a powerful strategy for improving supply chain efficiency while fostering collaboration between retailers and suppliers. Be it with the buyer, looking for ways of ensuring stock availability, better responsiveness and reducing costs… or on the supplier side to gain better understanding of their customer while reducing the impact of the bullwhip.. VMI is a practical, tangible approach that is proven to work. Tech advances haven’t made this obsolete.. they’ve made it easier.
