Vendor managed inventory isn’t a recent idea, though it has not been implemented by very many merchants. Whenever it is applied in the correct manner, it can bring massive benefits to any business.
A vendor managed inventory is where the supplier takes responsibility for inventory management instead of your company taking care of it in house. When implemented and managed correctly it can be a very effective strategy, one it’s main beneficiaries is Walmart, who could put a large part of their success down to successful implementation.
The traditional method of in-house inventory management leaves businesses open to stocking excess inventory, or understocking, neither of which are desirable as one will be costly and the other will prevent your business from being able to meet demand. The problem is finding the right balance between holding enough stock to meet peak demand and not overstocking so you have excess inventory when it’s not needed.
Allowing vendors to take over some of the inventory management reduces the impact of this problem, as it is shared between sellers and buyers. The goal is to ensure that the buyers, who are retailers, only purchase what they can sell. Contact is maintained with sellers, who are usually manufacturers, so that stock is only purchased in small quantities more often.
The key to the system is that inventory management is taken care of by the seller, who distributes it to the buyer according to real time demand projections.
This is opposed to depending on quarterly sales forecasts dictating how much retailers will buy from their suppliers. It depends on retailers constantly updating their suppliers about inventory counts, and the suppliers can then anticipate and manage demand and send frequent shipments when required.
This is made possible by the communication technology which is available today, especially Electronic Data Interchange (EDI), which is a messaging protocol which lets different companies systems communicate directly with each other.
This is of great benefit to the customer, as the products they want are always there at a price which is not inflated to cover the retailers losses.
It also brings the manufacturers closer to the customer, by providing information about the manufacturing process to them due to the closer relationship they have with the retailer, and this is important in todays marketplace.