Owning your own business is tough work, especially when you have inventory to take care of. Between predicting customer trends and seasonal supply and demand, trying to maintain the right amount of stock in your warehouses is just the tip of the iceberg, let alone everything else it takes to keep a business going. The nice thing about technology, however, is that it inspires new ways of accomplishing old tasks if not directly through application, then indirectly through process. Vendor-managed inventory is one such process — one that any retailer in the 21st century ought to know about.
As industries begin to shift towards distributed order management — that is, warehouse responsibilities are spread and shared by all parties in the supply chain — transparency between retailers and vendors is becoming more and more commonplace. As opposed to the traditional model where retailers would keep their inventory numbers close to their chests, cloud-computing and instantaneous feedback connects retailers and their suppliers, sending information back and forth automatically. Without needing to prompt vendors and estimate need based on past consumer trends manually, these technologies make sharing information and reacting appropriately more efficient than ever before at the cost of additional trust between companies.
Image source: Drive Your Success
Systems where wholesalers handle their customers’ inventories are accurately termed “vendor-managed inventory.” Most basically defined, these models shift warehouse responsibility away from retailers at the end of the supply chain onto their suppliers who help fill their shelves.
In exchange for a bit more information access and trust, retail store owners no longer need to micromanage their inventories; instead of needing to overstock in preparation for a holiday rush, vendor-managed inventory favors on-demand restocking. In other words, the vendor makes sure retail inventory stays at a certain level, filling in the gaps before their clients even notice or find themselves in a shortage.
In comparison to other traditional models, vendor-managed inventory is one of the better innovations that capitalize on a trend of reactive scalability so common in today’s economy (pop-up retailing and on-demand warehousing are two other prime examples). But how, exactly, is it shaping logistics today?
The most obvious benefit to vendor-managed inventory is that it encourages closer relationships between vendors and their customers. With increased access to customer inventory information, vendors start to develop a sense for what each of their customers might need simply due to proximity. Especially if vendors lease space within their customers’ warehouses, the supply chain (and the people who comprise it) becomes more unified. With the two parties working side by side, the success of one becomes the success of both; if a retailer’s inventory falls short, the vendor’s not too far away to intercept and keep the chain moving for the good of the team.
This proactive approach translates to a reduction in lost sales and per-unit freight costs. Keeping the chain in mind, if a retailer’s shelves are empty, they can’t sell any goods, bleeding potential at the cost of disappointed customers. This, in turn, means the retailer isn’t buying from the vendor to keep shelves stocked, costing them lost sales as well. By keeping vendors nearby — either in the same building or a local warehouse — the cost of moving goods is also reduced; less distance means less money spent on resources to close the gap.
Of course, this cost relationship moves both ways: the more money both vendor and retailer save, the cheaper they can sell their products to store customers. As Supply Chain Digest puts it:
“In a [vendor-managed inventory] relationship, the supplier holds inventory onsite or near the customer, allowing the customer near-instance access to the inventory. This immediate access allows the customer to pull inventory as needed and only pay for that which is consumed, thus reducing inventory investment and increasing inventory turns. In most [vendor-managed inventory] arrangements, the supplier has the responsibility for replenishing stock, which would include ordering the inventory, managing the logistics to ship the material, and counting the inventory. By passing these costs normally managed by the customer on to the supplier, the customer is able to reduce the overall cost of their product and increase their margins.”
A lot of this success boils down to how vendor-managed inventory lets everyone in the chain do what they do best. Retail store owners can focus on managing their companies and staff; vendors who know their products intimately (more often than not, better than those they sell them to) can handle their storage from start to finish; and customers can keep buying things off the shelves so long as they’re filled. By letting experts handle the part of the process they’re good at, everything should move smoothly right?
Well, in the world of business, if only it were ever that easy.
Like all relationships built on faith and teamwork, the supply chain is only as strong as its weakest link. That being said, not all vendors are rock stars at inventory management — in fact, you might be worse off if you don’t choose wisely. That isn’t to say, however, that if you’re a retailer, you can’t make their job easier if you decide to enter into a vendor-managed relationship:
“One of the key things to know about [vendor-managed inventory] is that businesses need to set limits and controls on supplied quantities, including minimum and maximum quantities. At the same time, businesses need to make sure these limits aren’t too restrictive, otherwise they’ll impede the vendor’s ability to accurately meet demand. This becomes particularly important when you’re setting fill-rate requirements. You don’t want to require 99 percent fill rates without an increase in inventory levels if you were only getting 95 percent fill rates when you managed the inventory.”
But let’s say you’re already in a vendor-managed inventory arrangement and things aren’t going as planned. The vendor isn’t delivering as expected, leaving you and your staff in the lurch in the midst of a holiday rush. What if their staff isn’t trained well enough to use the technology needed to keep the chain moving? After all, metrics don’t generate themselves and a computer is only as useful as its operator.
Conversely, what if you’re a vendor and things aren’t working out with the customer you just leased space from? What if they go out of business and you have no room back at your main warehouse, leaving the stock you had waiting on-demand for them without a home? What if your customer’s demands are bigger than you expected, putting a strain on your own logistics?
With more access to information and numbers intertwined between vendor and customer, the reliance built on one another might be harder to undo, not unlike a proper divorce, divvying up space and property so both parties can move forward independently. If we’re going to keep up with the marriage analogy, however, such a fate can be avoided by selecting the right partners to begin with.
Though vendor-managed inventory isn’t a perfect system, it is one that refine the supply chain by unifying its links. Whether you’re a vendor or a retailer who relies on one to keep their doors open, this symbiosis puts the success of everyone into everyone’s hands. The best relationships are the ones where everyone moves toward a single goal; the supply chain is no different.
When it comes to chains, it’s better to have a strong one throughout than one with weakened links. And unless you like to live dangerously (and enjoy guessing and micromanaging your backroom), vendor-managed inventory might be the reinforcement you and your business needs
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