Tag Archives: VMI

The value of VMI programs

In a recent issue of a supply chain magazine I read an article which questioned the value of vendor managed inventory (VMI) programs. The basic argument of the article was that the cost and difficulty of managing these vendors outweighed the value. While I understand these points, I can see several advantages to these programs – if they are well-run. These are:

1. Vendors frequently know more about their industry than retailers do. The value here is that for companies that carry many skus, they cannot know the inside story of every supplier’s industry. This is particularly true with industries that deal in commodity items, such as metals, or in industries where raw material costs and availability strongly influence assortments and pricing, such as the candy or coffee industries. Retailers and resellers need to develop strong relationships with these kinds of suppliers in order to benefit from the supplier’s industry knowledge so that they can collaborate in managing assortments, pricing and products effectively.

2. Vendors frequently know their customers and markets better than resellers or retailers do. Customer preferences change as trends and markets change. As an example I learned from a supplier that candy sales tend to drop in a market when companies cut overtime, as people who are not working longer than expected no longer need an extra snack to hold them over until their day ends. In addition some product sell only in specific markets, and placing them elsewhere can be costly. Your suppliers can steer you away from plans that put their products where there is limited opportunity for sales.

3. Vendors know how to price product competitively and how to assort locations correctly. Suppliers know the prices that your competitors charge for their product, and they know what products sell in each market, and when these change. While they can’t share competitive data, they can help you stay current in pricing and assortment.

To get the most value out of a VMI relationship, companies need to treat them as partners in supporting and growing the business. Regular communication of sku performance and inventory data is a minimum requirement. Annual plans with reasonable sales growth goals and quarterly performance reviews are important. And an agreement that specifies the packaging, shipping, placement and return policies helps to prevent nasty surprises once the program is in place.

I believe there is great value in having strong, well-managed VMI programs in your locations. These programs require attention and resources, but in return I believe you get industry and product knowledge that you cannot get on your own. And since every square foot of space in your locations needs to be profitable, it makes sense to include these suppliers and the value they can offer in your programs.

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