In a well-developed Customer-Supplier relationship, some items of inventory may actually be managed at the customer’s facilities by the company that supplies them. These items of inventory (and this practice) are called Vendor Managed Inventory (VMI).
With VMI, the customer effectively outsources part of the inventory management function to the supplier. On the surface, it appears as though the Supplier is just doing more work for the same amount of income from the customer. However there is a pay-off for both parties;
- For the Supplier – Improved visibility of stock levels and movements, means they can improve planning, responsiveness to customer and therefore customer service as a whole; and
- For the Customer – It can reduce administration, therefore paperwork and costs. Also it improves the security of supply to them.
VMI is not applicable for all items. However three common examples of areas where it can work very well are;
1. Retail – Fast Moving Consumer Goods (FMCG) continually re-stocked;
2. Consumables – with manufacturing for example, items used often in supporting the production resources; ranging from gloves to toilet roll, to common maintenance filters etc. for machines; and
3. High volume, low value items – which are commonly classed as C within ABC analysis; such as nuts, bolts, fasteners etc.