The retail giant began circumventing distributors in the 1980s, handing over inventory management in Wal-mart warehouses to key suppliers, a strategy that required close collaboration through the company’s legacy inventory management technology system.
The result was that by the end of the 1980s, Walmart had reduced its distribution costs to 1.7% of sales, 33% to 50% of what its major competitors were spending at the time.
No wonder Wal-mart has become the primary use-case for VMI programs.
Generally speaking, VMI is a demand-driven, continuous replenishment process that retailers use to strike a balance between high turnover and shelf space. It most prominently involves big retailers collaborating with big brands with fast moving, high volume products. The vendor is given some means to monitor the retailer’s shelves, physically or virtually (for example, through inventory management software integrations, EDI connections, etc.) with the onus of restocking the retailer’s shelves based on agreed demand planning parameters.
There are many iterations of VMI, but all flavours inject the vendor directly into the retail trading partner’s supply chain. Different VMI programs may also include replenishment functions and may require the vendor to:
- Monitor inventory in-store and physically replenish customer shelves as needed.
- Physically review inventory and arrange for replenishment at a later date.
- Continuously ship new orders based on daily electronic notifications of actual sales or customer warehouse stock levels, committing to replenish sales without the need for the customer to fill out a new purchase order. The purchase ordering is automated based on predetermined stock levels.
- Make decisions about re-stocking its products based on realtime stock level, orders and forecast reports through direct inventory management system access, and arrange for delivery to customer warehouse or direct to store.
- Hire an onsite inventory planner to work fulltime in the customer’s facility to maintain stock levels and help with demand planning. This is a common choice for large brands working with with big retail trading partners with complex supply chains.
It is important to note that VMI programmes are about managing inventory. They are separate from the question of who owns the inventory, and they should be distinguished from the concept of Vendor Managed Replenishment, although the lines tend to be hazy. Typically, a vendor will own the inventory until its products leave its warehouses and reach the trading partner’s shelves.
VMI may appear at first glance to only benefit a vendor’s trading partner, but it is often the best way (especially for large suppliers) to get prime shelf space in physical stores, leading to higher turnover volume and greater sales. VMI programmes also give vendors better long-term demand planning data and fewer returns thanks to decreased ordering errors, not to mention the potential for a better working relationship with retail partners.