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Vendor-Managed Inventory (VMI)

The logical extension of the lean philosophy is to turn over full responsibility for purchased inventory replenishment to the supplier. This strategy is termed vendor managed inventory (VMI). From the buyer’s standpoint, the goal is to eliminate the purchasing planning and order management functions that simply add time and cost by having the supplier directly manage the entire process. From the supplier’s standpoint, the goal is to build as much forward visibility and flexibility into production and delivery as possible so that the buyer’s goals are met in as short a time frame as possible at the minimum cost.

VMI Mechanics

Instead of the buyer determining purchase requirements and transmitting them to the supplier, the supplier assumes the responsibility for determining which items need replenishment, transmitting the requirements, and delivering product without direct oversight by the buyer. Demand visibility can be achieved with various technologies such as point-of-sale (POS) information or MRP output relayed directly to the supplier’s planning system via electronic data interchange (EDI) or the Internet. Once product is delivered, the supplier can then invoice the customer directly, computer to computer. The ultimate form of payment is direct debiting, in which the invoice is pre-authorized for payment and funds are automatically transferred to the supplier’s receivables without time-consuming and costly manual payables activities. VMI relationships require a strong sense of mutual trust and solid contracts existing between the two parties. While the buyer will no longer be directly managing the purchasing process, they nevertheless will be expected to closely monitor activities and work with the supplier to ensure continuous improvement in replenishment processes.

Consignment

In this arrangement, the supplier physically delivers the product to the customer for use, without receiving payment until after goods are used or sold but retains title to the product until the customer uses it in production or sells it. The supplier replenishes inventory through a periodic review or by receiving notification from the customer. Careful consideration must be made differentiating vendor-owned versus vendor-managed.

On-Site Representation

In this model, the supplier stations its own inventory planners at the customer’s site. These planners are integrated into the customer’s planning and purchasing departments. Their role is to work with the customer’s inventory planning output and place replenishment orders directly with their own companies without the participation of the customer.

Supplier Co-Location

This practice locates suppliers at the manufacturer’s site, so the primary benefit is that they are onsite. The manufacturer can be highly engaged and become an integral part of the business, whether this is during the design stage or to help scale up production during growth.

  • Typically locates a supplier or multiple suppliers within a single location.

  • Can bring together people or groups in related roles for product and process innovation, to generate ideas and design new products, or to conduct prototyping and product qualification tasks.
  • Level of integration can vary.
  • Can be market-driven or might involve exploiting technology-based products and services.
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