Vendor managed inventory is an important business model. Your small business should utilize VMI for your supply chain. Here’s your VMI guide.
Small manufacturers need outside resources to stay competitive. Vendor-Managed Inventory (VMI) keeps them both nimble and efficient. Here’s how you can leverage this resource to your advantage.
Manufacturers of all size need dozens or even hundreds of resources to create products. Each needs strategies to manage those resources. But not all companies do this effectively.
Large companies can afford warehouse space and technology to manage their inventory. For small businesses, however, that’s not economical. If you take on those responsibilities, your profitability can slump.
With vendor-managed inventory, small and mid-size manufacturers relieve themselves of added inhouse costs, while vendors enjoy the extra revenue.
How Does Vendor-Managed Inventory Work?
The supply chain is made up of several segments and operations. Companies take on substantial costs when they try to manage all aspects of the chain alone. When several companies invest in a resource together, such operations become cost-efficient.
Warehouse space is a common example. It’s expensive to build, staff and operate your own warehouse. You may not always fill the space, which becomes a wasted resource.
But when companies share space, they can save up to 50% in warehousing costs. These third-party warehousing firms will partner with several companies to make space and staff cost efficient.
Similarly, inventory management is costly and inefficient if you’re a stand-alone. Vendor-managed inventory lets manufacturers pass those responsibilities to their suppliers.
Where are the savings?
Suppliers pass their inventory to manufacturers through the supply chain. Suppliers are, by nature, best-positioned to manage the inventory they supply.
Manufacturers can partner with several suppliers in this way. This makes inventory management more affordable. The manufacturer pays each supplier for a simple addition to their responsibilities.
When manufacturers save money, they can charge their customers less. They also can increase efficiency and limit internal risks. They streamline their link in the supply chain.
Why VMI Helps Suppliers
No successful business deal is one-sided. Suppliers benefit by tightening their partnerships with manufacturers. Manufacturers increase their suppliers’ dependence to lock in future business.
These suppliers also become resources for new business needs. Since manufacturers tend to build on existing relationships, they’re more willing to leverage already successful inventory management.
These agreements also reduce inefficiencies. Tight-knit operations prevent over- and under-stocking. There’s better communication about monitoring and regulatory requirements.
In these partnerships, suppliers effectively shift responsibility away from manufacturers. With effective service, manufacturers will not re-adopt inventory management. Suppliers become as indispensable as their internal teams.
5 Steps to Create a Good VMI Relationship
It’s likely you and your suppliers have heard of VMI. But this relationship is unique to each supply chain. The steps you take to get there are as important as the operational details themselves.
You need to be confident in your partners. The following five strategies will help you take the next step.
Establish Clear Expectations
Assume you establish a VMI relationship with a supplier. You have immediate needs the moment you approach them. A month later, you make a request unfamiliar to them. They feel they never agreed to it, and complications ensue.
You must first build trust by communicating needs and expectations. Clients develop expectations that go beyond scope or capabilities. Consider what your needs will be in the future. Discuss flexibility, expansion and possible barriers to success.
Create an Operational Foundation
For both parties to succeed, your standards, technologies and communication must connect. If you already have a relationship, you’re one step ahead. But as your relationship progresses, you may discover integration needs you didn’t foresee.
You may find you need greater inventory insight. Decide if this requires internal training on new technologies. Determine in advance what the flow of information will look like.
You’ll need to fulfill orders even if something goes wrong. Be sure you have measures in place to handle emergencies. You also want to take advantage of unexpected success without your inventory running out.
Establish Fluid Communications
Your suppliers will become very close to your organization. They may even begin to resemble internal departments. That’s why effective communication is essential.
Set up regular meetings with clear purposes and key performance indicators (KPIs). You should hold suppliers just as accountable as your own staff. You can challenge them on their performance this way.
You can also make recommendations and learn. You’ll share success or failure with them. It’s important you understand their business just as well as they should understand yours.
Coordinate Risk Management Preparedness
Your suppliers will still differ from your internal teams. Internal teams are accountable when they responding to disasters. But vendors aren’t required to step outside of their agreed-upon responsibilities.
Your agreement with vendors should be economical for both of you. You must establish how certain emergencies affect both parties. By their nature, clients who lose buying power hurt the third-party vendors that service them.
Prepare specific actions for when disasters occur. You should leave no room for internal confusion on the part of your suppliers. The better prepared your suppliers are, the less likely a disaster will become fatal.
Be Aware of Jointly Managed Inventory (JMI)
Experts describe VMI as a stepping stone toward Jointly Managed Inventory (JMI). This arrangement is not in wide practice yet. But it’s considered the future of the supply chain.
That’s because under JMI, suppliers and manufacturers establish even tighter connections. Manufacturers can see real-time data about management and inventory. It’s a level of integration now possible only because of modern technology.
The supply chain has always been complex. The required connections, measurements and documentation are in constant need of reassessment. As organizations become closer, these efficiencies pass through the network, even to your end customers.
Enhance Your Business with Customized Warehousing
Dakota Warehouse is dedicated to enhancing your business. We find cost savings through large-scale warehousing and light manufacturing. And we customize our services based on your needs.
Contact us now for an informal consultation. We’ll help you get to the bottom of your core issues and discuss possible strategies. It’s a smart business step you won’t regret.