Vendor Managed Inventory

Home Glossary Vendor Managed Inventory

What is Inventory Management?

Inventory management refers to streamlining the maintenance of inventory in all its aspects like ordering, maintaining stocks, handling, and distributing raw materials or finished goods. It can be the backbone of an organization to meet sales, marketing, and revenue generation goals. Oftentimes adopting an inventory management software can help drive improvements in IT software when the databases need to be connected across multiple teams to sync accounting and stocks together.

Good inventory management means that stocks are always maintained at the right levels at the right time. This involves the following components:

Inventory Types – Businesses should always know exactly what they need.
Forecasting – To predict demand-supply balance and be ready with stock.
Purchase Order Management- In line with real-time needs and forecasting, orders must be placed with suppliers.
Storage of Inventory– Knowing where the stocks are and where to dispatch from.
Handling and Tracking– Involve processing sales, packing, shipping, and keeping track of additions, removals for order fulfilment and stock levels.
Inventory Management System– Simplifies tracking and accounting so that analysis and business decisions can be made easily.

What is Vendor Managed Inventory?

In the Vendor Managed Inventory, the inventory management is done by the vendor or supplier for the buyer, the buyer usually being a manufacturer, SME, MSME, or any other customer type.

In traditional supply chain management, the buyer identifies the existing inventory level and determines the stocks of raw material, components, or finished goods that are needed as well as the timeframes for addition and subtraction. The buyer then places purchase orders with various suppliers to source the requisite materials. These suppliers will fulfil the orders and raise invoices with the buyer.

Vendor Managed Inventory takes this process out of the buyer’s hands by identifying the stock levels and the requisite inventory, and supplies everything as agreed upon, and only raises the invoice. The buyer need not concern themselves with managing the inventory and closing any demand-supply gaps. It’s all done by the vendor, often including the sustainable packaging requirements during procurement.

For inventory management by vendors to be successful, some important factors must be in place as follows:

Very clear communication about the scope of the inventory management and buyer expectations in terms of stocks and timeframes.
Modes of efficient exchange of information- whether to use apps to communicate needs in real-time or pre-determined needs maintained via sheets, etc.
Escalation Matrix for when there are emergencies or immediate orders to fulfil.
Agreed-upon procedures for periodic performance review
A collaborative approach towards vendors and open information sharing.

The most famous examples of vendor managed inventory include giant retailers where hundreds of suppliers or vendors maintain inventories of their product within the massive warehouses. Closer home, many B2B companies like Moglix, favour vendor managed inventory due to its advantages.

Benefits of Vendor Managed Inventory

Vendor Managed Inventory (VMI) improves the supply chain’s efficiency and contributes to higher sales and faster inventory turnaround.

VMI takes the trouble of maintaining stock and getting end customers what they need out of the buyer’s hands. The buyer can invest time and other resources in optimizing the sales and development growth aspects of the business.
It reduces any chances of delay in restocking due to communication or logistics lag between the supplier’s provisions and the buyer’s order. The buyer can potentially never go out of stock if the system is designed well with good forecasting and analysis.
Vendor Managed Inventory makes it possible for the vendors to gain valuable insights into the sales data and demand-supply. It improves the ability to forecast future requirements for big orders or projects.
Buyers can cut down carrying, purchasing, and administrative costs by outsourcing inventory maintenance. The need to maintain safety stock and high inventory drops as do warehousing costs.

It can also cut down on the consumption of resources as vendors can be incentivized to adopt sustainable packaging practices at more achievable scales.

Vendor Managed Inventory for Sustainable Packaging

Maintaining large inventories comes with the drawback of packaging waste and pollution for manufacturing industries and FMCG sectors. Companies have historically tried to cut inventory management costs and have faced backlash in recent years due to environmental damage.

Moving to a Vendor Managed Inventory model can help with the global shift towards sustainable packaging for SMEs, MSMEs, and large companies alike. Sustainable packaging solutions providers like Moglix enable lesser consumption and more recycling while mediating vendor managed inventory. They can help procure goods from vendors that will undergo sustainable packaging and then storage at Moglix warehouses before shipping with their freight logistics partners. Contact Moglix for your procurement and sustainable packaging needs.