Inventory management is usually a simple process for most small retail businesses. But, as you go higher up the chain, and your customers and inventory holdings increase, managing all that stock by yourself becomes challenging.
Some business owners opt for vendor-managed (VMI) and supplier-managed inventory (SMI) systems to meet product demand. With the right partner, VMI and SMI systems can provide an effective means of inventory management, allowing you to focus on more critical business operations.
In this article, we evaluate vendor and supply-managed inventory systems, including their benefits and potential drawbacks.
What Is a Vendor-Managed Inventory (VMI)?
VMI is an inventory management approach in which the vendor has some level of control over your inventory, even after delivering it to your warehouse. That way, you can relinquish all inventory-related decisions to your vendor.
While this agreement may sound counterintuitive, it might benefit your business by taking the inventory management workload off your hands. Essentially, it becomes your vendor’s duty to ensure you have the agreed-upon stock levels in store for when you need it.
This leads to improved efficiency in inventory management, as the automated systems employed in VMI reduce the potential for human error. Retailers also enjoy other benefits, including reduced complexity in managing inventory levels, improved data insights, and significant reductions in storage costs.
Unfortunately, utilizing the VMI inventory management approach can also breed unique problems. For starters, you lose control over the inventory management aspect of your business. You also have limited options as you have to stick with what your vendor can provide, leading to a reduction in competitiveness.
What Is a Supplier-Managed Inventory (SMI)?
In an SMI system, the supplier manages and replenishes the inventory in a retailer’s or distributor’s warehouse. That said, unlike vendors, who supply products acquired from a third party, suppliers are typically the source of the products, such as a manufacturer.
Under most SMI agreements, the retailer or distributor provides the supplier with information on anticipated demand and desired inventory levels. The supplier then uses this information to adjust its production processes and ensure sufficient inventory is available to meet demand.
Some of the greatest benefits of SMI agreements include increased flexibility, reduced inventory costs, and enhanced supplier relationships.
SMI agreements can also present notable drawbacks, the most notable of which is the potential for cost creep. Cost creep or hidden charges can occur in the form of management charges or higher product prices, thus overturning the agreement’s primary aim of reducing inventory costs.
Retailers working under SMI agreements also face difficulties switching suppliers as they’re often under contractual agreements, which can be difficult to get out of without risking litigation.
VMI or SMI?
VMI and SMI agreements are excellent inventory management solutions to any retailer or distributor who don’t have the time or skill to dedicate to the process. These systems also offer several other benefits, including analytical support and cost-saving benefits.
That said, anyone looking to get into a VMI or SMI agreement should be willing to relinquish some control over their business and data. You should also look for a reliable partner to avoid some of the challenges discussed above.
