Vendor Managed Inventory (VMI) is a business model where the retailer provides product activity (such as an EDI 852) to a vendor to compare against model stock for each store location. Once a vendor has this information, they integrate it with their wholesale ownership to determine production needs, what replenishment is needed by store and creating reverse PO’s.
Vendor Managed Inventory originated from the collaborative forecasting movement that strives to put resources from both retailer and supplier together for mutual advantage. For many vendors it is the holy grail of business – The power to write their own orders and ship directly to retail stores. And enhance their relationship with their retail partners. But as they say, “with great power comes great responsibility”. It seems so easy, yet ensuring that risk is reduced on both sides while getting the maximum amount of sales and profit from inventory turn is anything but. It can be a daunting task to ensure every SKU-store combination is set with the right amount of inventory at the right time. VMI software has been mostly reserved for only the top tier suppliers, but lately we have been seeing more apparel and accessory related buyers wanting their vendors to do more. It makes sense for them, as their resources are steadily reducing over time and pressure constantly increases to improve the bottom line. Improved turns and lower out of stocks resulting from a well-executed program will surely help.
A difficult part of the program is determining what the inventory should be for a given location.
For a Vendor Managed Inventory program to be successful several key issues must be addressed and sophisticated data integration tools are needed. They include:
- Agreement from the buyer on inventory model tolerances, usually a weeks of supply or dollar amount.
- Agreement on what the projected inventory need calculations will be.
- Accurate and consistent flow of weekly sales and inventory data by SKU by Store.
- Daily wholesale available to ship and future production.
- Historic sales by SKU by Store (usually two years).
- Understanding of weather, seasonality, promotional plans and other market or assortment changes that may affect sales broken down at the appropriate level of planning.
- Ability to calculate and make up for lost sales.
- A system with algorithms to properly allocate based on different events (not enough inventory to ship to all stores that need, open to buy limitations, build up for special events, etc.).
- An interactive reporting platform to easily view exceptions and roll needs and estimates in user defined formats.
- Hardware with substantial processing power (a laptop won’t cut it).
Finally, some advice:
- A good system is designed to pick up trends more quickly than retailer’s auto replenishment systems to reduce lost sales.
- Many VMI software providers lack the understanding of the buyer-supplier relationship and all its nuances. Be sure to work with a company with that background, whose retail solutions are specifically designed to make it easy for the user and put data in a buyer friendly format.
- Look for a solutions that can run automatically yet still give the user an easy means to adjust the orders. Integration with a Business Intelligence/Ad-hoc reporting platform is an excellent means to that end as it provides a faster and more flexible way to streamline VMI results.