The vendor monitors sales and inventory. Once shipments are made, vendors pay close attention to the buyers’ sales and determine whether the original forecast was correct.
The vendor makes calculations based on demand forecasting and lead time for reorders. Because vendors are continuously monitoring inventory, they know whether previous forecasts were accurate and when slow or busy seasons are. With all this information in mind, the vendors run their reports and make recommendations.
The vendor places reorders. After a final review, the vendor places reorders and sends an ASN if necessary.
The process repeats unless the vendor or buyer terminates the relationship. With practice, this flow becomes a seamless routine for team members on the buyer and vendor sides.
Advantages of vendor managed inventory
VMI is a simple strategy that helps companies improve a lot of inventory goals.
Reduced risk. VMI naturally balances out inventory among buyers in accordance with typical spend and seasonality, sparing those companies from spending money on items that will never sell.
End of cash flow restrictions. Most buyers try to structure contracts with vendors to pay for inventory when it’s sold. And both buyers and vendors monitor VMI processes carefully to optimize inventory replenishment. These practices reduce unnecessary spending and increase companies’ spending power.
Lower levels of inventory. Optimized inventory means there is little to no overstock — even during busy or slow periods.
Decreased carrying costs. VMI reduces excess stock, eliminating the need for large storage centers. This allows companies to save on real estate.
No safety stock. Safety stock (or buffer stock) ties up money and opens buyers up to future revenue loss. When vendors gain access to buyers’ sales data, they can combine it with their lead time to get just enough inventory to buyers — right on time.
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