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.

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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Vendor Managed Inventory: Is it right for you?