Companies practicing lean manufacturing can benefit highly from vendor-managed inventories, or VMI. Unlike traditional inventory management, a VMI arrangement is between two companies. The arrangement is used to lower the cost of inventory for the customer companies. It is also a way for the manufacturers of the inventory to help supply the companies as needed. However, there are only three things that you need to know about VMI relationships and how they work.

How They Work

There are two parties involved: the manufacturer of the inventory, and the retailer, distributor or another manufacturer who actually owns the inventory. The original manufacturer holds the goods until they are needed by the customer (the manufacturer, distributor or retailer) requests more inventory. Special arrangements allow the original manufacturer to send shipments based on information gathered about the customer. The customer company agrees to accept the shipments, because their inventory should technically require stocking. VMI arrangements are used by companies large and small to greatly reduce lag time in supply chains. However, the system requires detailed synchronization of your point-of-sale information.

The original manufacturer of the inventory must know how much to produce and when. To accomplish this, they must use some of the same methods that its customers would use when storing their own inventory. The point of sale information from retailers tells the inventory manufacturer when goods are sold and the number of goods sold. Retailers using the VMI system must be willing to share this information in order to make the most out of the relationship. Manufacturers who use VMI share their production schedules, while distributor customers share their “ship-to-stock” information.

Moving Merchandise is Key

The successful use of marketing and sales campaigns are essential for moving the inventory through the systems. The VMI system does not work properly if the previous inventories are stuck in the storerooms. Companies should make a new marketing and advertising campaign a priority when beginning a VMI system. Companies entertaining vendor managed inventory should consider the importance of sharing information with the vendor and also becoming aggressive in moving the inventory. These points, along with an understanding of how the system works, can make the VMI experience a positive (and profitable) one.

Eagle Technologies Group is an industry leader in the design and installation of factory automation systems worldwide.