By handing over the full responsibility of inventory management to a distributor or supplier, vendor managed inventory allows airlines and MROs to increase margins by cutting overall costs. But how do you make the most of VMI and what are the advantages of disadvantages of vendor managed inventory?

As more and more airlines look toward vendor managed inventory programs to create a lean supply chain, the traditional supply chain equation is under pressure.

But what exactly is vendor managed inventory? Vendor managed inventory is an inventory management solution that offers a cost-efficient way of handling inventory. Vendor managed inventory means that the distributor or supplier is responsible for maintaining and optimizing the inventory levels of the customer, usually at the customer’s desired location.

The customer shares consumption data with the distributor who’s then able to continuously monitor, optimize and maintain the agreed upon inventory plan.

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The expert explains: Vendor Managed Inventory  

David F. Pyke, Professor of Operations and Supply Chain Management at the University of San Diego’s School of Business, has published numerous academic research papers on operations strategy and supply chain management and co-authored the 2017 book "Inventory and Production Management in Supply Chains". He knows just about everything there is to know about vendor managed inventory, which is sometimes also referred to as "supplier managed inventory". 

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The benefits or advantages of a vendor managed inventory, he notes, aren’t only apparent for customers; the vendor or distributor is equally able to optimise their operations, as it grants them the possibility to observe and predict part demand in near real-time – thus creating an almost symbiotic relationship. 

»As the name implies, with vendor managed inventory, the vendor assumes responsibility for determining replenishment quantities for its customer. The customer provides the vendor with demand information, usually on a daily or weekly basis. This allows the vendor to observe demand almost as it occurs,« he says.

The history of Vendor Managed Inventory 

The idea of vendor managed inventories was first adopted by consumer goods manufacturers. Since then, it’s spread to a variety of different industries, including the aviation industry.  

»Although it’s widely used today in many industries, the earliest instances of VMI involved consumer goods manufacturers assuming replenishment planning responsibilities for their large retail customers. Common implementations today are with service parts and maintenance, repair, and operating (MRO) supplies,« David F. Pyke explains and continues:

»Some vendors not only manage these supplies from their own sites but have warehouse space in the customer's facilities from which they manage the inventory of products they sell to the customer.« 

Two workers discuss vendor managed inventory

Traditionally, airlines and MROs have to spend time sourcing, processing and chasing high demand parts every time their inventory runs low. Vendors, on the other hand, have little to no insight into the customers’ consumption, making it difficult to stay on top of demand and delivering their goods on time.
»The traditional approach is that the customer maintains complete responsibility for managing its own inventory.  It places orders, and the vendor responds to these requests. The vendor, therefore, has much less awareness of actual demand.  Rather, it can only observe orders placed by their customer, and these tend to arrive infrequently, interspersed and with long periods of no orders,« David F. Pyke says. 

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Vendor managed inventory advantages & disadvantages

Vendor managed inventory programs offer some obvious benefits and advantages for customers when it comes to inventory costs and delivery, as it allows them to pull inventory as needed and only pay for what is consumed. This reduces the need for heavy inventory investments and increasing inventory turnovers.

Advantages of vendor managed inventory (VMI)

David F. Pyke elaborates on the advantages of vendor managed inventory from both a customer and vendor perspective:

»With visibility into its customers’ inventory, a vendor can anticipate the inventory needed of its customers, allowing advance scheduling of production or transportation. The precise benefits to the vendor will vary, depending on the situation. Better demand information certainly can improve forecasts of the vendor, which in turn, allows the vendor to reduce its inventory without sacrificing service. In addition, a shift to a vendor managed inventory may enable smaller, more frequent shipments, since the vendor can anticipate customer orders. The customer also benefits by potentially receiving better product availability and shifting some of the cost of managing replenishments to the vendor,« he says.

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Disadvantages of vendor managed inventory (VMI)

As with any other business model, there are some disadvantages of vendor managed inventory. The biggest disadvantage of VMI being the fact that airlines and MROs have to give up some level of control over their business, as they hand over the responsibilities of managing their inventory to a vendor or distributor.

Doing so may be challenging for many airlines and MROs, as they need to have a profound trust in the vendor or distributor. The vendor, on the other hand, has to be capable of the responsibility a VMI agreement implies. This is why it’s essential to enter a VMI agreement with an experienced partner that has a proven track record.

»The disadvantages of vendor managed inventory include the customer’s loss of control. If they do not trust their supplier, this would be a deal-breaker.  Likewise, if the vendor is not able to handle the added responsibility, or cannot provide excellent service, the customer may experience frequent stockouts. Their relationship with their customers could be damaged,« says David F. Pyke.

When to use vendor managed inventory

If your inventory has gotten out of control, entering a vendor managed inventory agreement with a well-established partner may very well be an excellent solution.

You should evaluate how much time and money your organisation spends on inventory management tasks such as sourcing, processing and chasing orders. Being frequently out of stock for high demand parts or overstocking to make up for poor planning capabilities, are also signs that indicate you can benefit from vendor managed inventory.

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Ask yourself if your organisation possesses the competencies required to plan and manage your inventory efficiently or if you would be better off outsourcing these activities to someone who specialises in them?

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VMI is also more applicable to some products or industries than others. Highly seasonal goods, for example, may not be as appropriate for VMI, as items with a relatively steady demand pattern, e.g. high moving aircraft parts.  

»There are certain product characteristics where VMI is most applicable, for instance, goods that exhibit limited seasonality.  Although demand can be variable, its average level does not change dramatically over time, and this is an ideal situation for VMI.  On the other hand, highly seasonal items may not be as appropriate for VMI,« David F. Pyke explains.

Vendor Managed Inventory (VMI) Vs. Consignment Inventory (CI)

Vendor managed inventory and consignment inventory is closely related but there are some key differences in the two, as described below. 

A vendor managed inventory (VMI) refers to a vendor managing your inventory, while consignment inventory relates to the ownership of the inventory. 

You can have VMI that isn’t a consignment inventory, and you can have a consignment that isn’t a VMI. To make it even more confusing, you can also have an inventory model that utilizes both vendor managed inventory and consignment inventory.

A consignment inventory, CI, essentially means that the customer doesn’t own the inventory in their warehouse; it still belongs to the distributor or supplier. In other words, the distributor makes their inventory available at the customer’s site, and the customer only pays for the parts when they consume them.

With VMI, the vendor manages and controls the inventory and stock, determining how much stock the customer needs in their warehouse and makes sure that they have the required parts when their inventory runs low. In this scenario, the customer purchases the parts before they consume them, but ideally only buy what they need.