Many companies opt to work with a third-party vendor to manage their inventory. In inventory management, this offsite inventory is known as vendor-managed inventory, or VMI.
Wondering whether vendor-managed inventory is a smart choice for your company? Read on for a complete definition of vendor-managed inventory, then review the many pros and cons of VMI.
What is vendor-managed inventory?
Vendor-managed inventory (VMI) is a common supply chain arrangement where a supplier, manufacturer, or other qualified third-party controls the inventory and inventory-related decisions on behalf of the seller. In other words, the seller outsources their company’s inventory management—including inventory counts, orders, audits, and sales—to a third party.
The VMI vendor is traditionally located offsite, in a location that’s convenient for the business. This could be a warehouse adjacent to a shipping center or a retail location like a clothing boutique.
Some arrangements between businesses and vendors include an additional party: a third-party logistics provider. This extra collaborator can smooth over hiccups in the supply chain, creating a more optimized system for all parties involved. These “3PL” experts can be especially helpful if your VMI is subject to extreme fluctuations in demand.
Benefits of vendor-managed inventory
There are many benefits of vendor-managed inventory, from reducing your company’s workload to potentially reducing carrying costs. But, of course, VMI isn’t right for every company, and these benefits don’t always materialize. Before deciding to outsource your inventory management, consider whether VMI is right for your specific business model and research potential providers thoroughly.
Benefit #1: The vendor takes full responsibility for your inventory
Being able to outsource virtually all your inventory management is a major potential benefit. The company assigned to your VMI will take complete responsibility for your inventory, which means reduced strain on your team. This can be particularly beneficial for companies with large inventories or complex inventory practices.
Your vendor will be responsible for:
- Determining how much inventory to keep on hand
- Receiving inventory and updating inventory records accordingly
- Managing those inventory levels, including physical inventory counts and year-end audits
- Selling and shipping that inventory, when required
- Restocking the inventory as needed
Having a vendor take full responsibility for your inventory can save your team time and stress—and may even give you peace of mind.
Benefit #2: Reduced risk of stockouts
Many companies that hire a vendor to manage their inventory enjoy reduced stockouts. That’s important because your company is in the business of swiftly satisfying customer demand, whether your team or an outside vendor is managing the inventory.
VMI may lead to reduced stockouts because ideally, the vendor knows exactly when the inventory is about to run out. Plus, the vendor is usually extremely prepared to replenish that low stock, since that vendor either is the manufacturer, or works closely with the manufacturer. Knowing this, the vendor should be able to restock inventory easily, without fear of long lead times, and with the knowledge that the manufacturer is ready to fulfill orders without delay.
In other words, you may find that with VMI, stockout risk is reduced primarily because your supply chain is faster and less complex.
Of course, there are other ways to reduce the risk of stockouts without the help of a vendor. For example, inventory management software can help you keep tabs on dwindling stock, reminding you exactly when it’s time to place your next order.
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Benefit #3: Reduced safety stock
Safety stock—that extra inventory your company keeps on hand just in case—is one of the best ways to avoid unexpected stockouts. That’s because with VMI, there’s often less concern about delays in the supply chain, especially if you’ve selected a vendor near your suppliers, near your customers, or both.
As a result, most vendors feel comfortable significantly reducing safety stock to a very low number. This is different for every relationship, however. Your vendor will manage lead times and make a judgment call on exactly how much to slash safety stock levels.
Benefit #4: May save money
There are many ways vendor-managed inventory can save your company money.
First off, you may find that your vendor can run business smoothly while carrying less inventory. Those reduced inventory costs can really add up, particularly if your vendor helps secure low-cost warehouse space, or if you no longer need to lease high-priced storage units near your own business.
Another way VMI might save your company money is by reducing your hiring needs. With inventory outsources, you may not need to hire administrators, accountants, warehouse staff, or shipping and sales staff to handle inventory. Instead, those costs are folded into your VMI arrangement, often at a lower price than paying for your own staff.
You may also find that your vendor can expertly negotiate minimum order quantities (MOQs), delivery fees, and better prices with suppliers than you’d be able to do on your own.
Benefit #5: Access to expert insights
When you work with a vendor to manage your inventory, you may also unlock access to that vendor’s expertise in inventory management. This includes their knowledge of the supply chain, fluctuations in demand, and creative ways to make your business more productive and profitable.
While it’s not a guarantee that your vendor will pass along all that wisdom to you, most VMI arrangements allow you, the customer, to lean on the experience and knowledge of your vendor.
Drawbacks of vendor-managed inventory
While VMI has many potential benefits, it comes with certain drawbacks, too. Whether your company is a good candidate for vendor-managed inventory depends on the specifics of your business, logistics, and goals.
Here are some potential drawbacks of vendor-managed inventory for you to consider.
Drawback #1: Full reliance on a third-party vendor
The main draw of vendor-managed inventory—completely outsourcing inventory management—can also be its biggest downside. Some companies find that their inventory processes are so complex that bringing a third-party vendor into the mix creates more problems than it solves. Furthermore, when you rely on a third party that may mismanage your inventory practices, the fallout could damage your relationship with customers.
Do keep in mind that not all vendors are the same. Just like finding suppliers you trust, vetting vendors to manage your inventory is serious business. You may find that only a few of the many vendors you consider are good fits to manage your company’s inventory. Or perhaps, at the end of the day, you’ll realize that you only trust your internal team to manage inventory.
Drawback #2: Sharing inventory records
When you work with a vendor to manage inventory, transparency and communication between both parties is absolutely essential. You’ll need to provide your vendor with detailed information about all your inventory, sales history, demand forecasting, and more.
Of course, organizing all this information and sharing it with a vendor takes time. And even though digitizing your inventory records is easy with an inventory app like Sortly, you’ll still need to decide whether your company wishes to share any of this information to begin with.
The main takeaway? When considering VMI, you’ll also want to weigh the administrative and privacy aspects of working with a third party.
Drawback #3: Difficulty making changes
While vendor-managed inventory means inventory responsibilities are taken off your plate, some companies find it challenging to make adjustments to their supply chain once they’re working with a vendor. That’s in part because you’ve handed all responsibility over to an experienced vendor that has their own inventory practices.
For example, you may want to shop around for new suppliers or explore whether there are any less expensive alternatives to certain products you sell. If you manage your own inventory, this is simple. But if you have VMI, you’ll need to ask your vendor to explore new suppliers and review price lists for you, which puts you one degree further away from the vetting process.
Some customers might also find that their vendors prefer to work with a shorter list of suppliers to streamline operations. This is great for keeping down costs and boosting efficiency, but there are tons of benefits to offering new, in-demand products from other suppliers, too.
To avoid any surprises, you should discuss how sourcing new supplier searches and adding new products to your inventory works when vetting potential vendors.
Inventory management software for VMI
Whether you’re a customer or a vendor, Sortly’s inventory management software can make tracking, ordering, and auditing inventory more efficient. Sortly offers visual inventory lists, barcode and QR code scanning, low stock alerts, custom organization, and more great features that can help you or a third-party vendor manage inventory.
Sortly makes it easy to organize inventory, upload high-resolution photos, collaborate with other users, and track inventory across multiple locations. This allows transparency and visibility, even when inventory is fully managed by a third party thousands of miles away.
Curious how Sortly could help your team get organized? Start a free, two-week trial today. You might even find that with Sortly, inventory management becomes so simple you don’t need a vendor to help you out.