Vendor-Managed Inventory

Many firms are trying to concentrate on the "core competences." They want to outsource minor tasks and activities when it is cost effective to do so. For a distributor, an example of one of these tasks is the replenishment of less-expensive products. For a manufacturer, it may be the procurement of MRO (maintenance, repairs, and operations) inventory. A popular way to outsource these procurement activities is a vendor-managed inventory (VMI) agreement. Under a VMI agreement, a supplier takes full responsibility for maintaining stock of its products at a customer's facility. VMI agreements differ from traditional consignment agreements in that the customer is billed for material when it is delivered, not when it is consumed or issued. When establishing a VMI agreement, the supplier and customer must agree on:
* The specific products that will be covered under the VMI agreement.* "Acceptable availability" of these products at the customer's site and the corresponding investment required by the customer. Usually the supplier and customer will agree on a "service level," which is the percentage of orders for a product that can be completely filled out of the VMI stock inventory. The higher the agreed-upon service level, the more the customer will have to invest in the supplier's products.
* How often the stock of these products will be replenished.
* The automatic return of material that is no longer needed by the customer.
Potential advantages for a customer participating in a VMI program include:
* Eliminating the cost of managing replenishment parameters and issuing purchase orders.
* Establishing an extremely reliable source of supply for products that are very important to its operations but represent a relatively small investment.
Advantages to the supplier include:
* Securing all of a customer's business for the types of products it supplies.
* The ability to better plan its own inventory replenishment needs because the supplier's buyers can monitor the actual sales or use of its products at the customer's site.