The benefits of Vendor Managed Inventory (VMI) programs for original equipment manufacturers are pretty clear. The increased visibility of distributor’s POS data makes forecasting easier. Promotions are more easily incorporated into the inventory plan. And, there is usually a remarkable reduction in distributor ordering errors. When combined, these benefits allow the manufacturer to focus more on providing great services leading to bottom line growth.
But have you ever asked yourself what the supplier gets from the relationship? Suppliers are tasked with inventory planning and storage which takes the majority of work out of the OEM’s hands. So, often, it might appear as if a supplier doesn’t really benefit from a VMI arrangement.
However, that’s not true. Suppliers can benefit from VMI agreements in three main ways;
- Increased sales
Sales increases in the 5% to 25% range aren’t uncommon in new VMI relationships. Factors contributing to such increases include fewer stock-outs and improved product mixes based on better demand visibility. Market share increases can also be realized when the customer increases the number of SKUs carried as a result of the increased profitability, lower costs, and improved services. Customers are also known to shift purchases to larger suppliers with more comprehensive, valued programs, partially explaining why entering a VMI agreement might increase your market share.
- Reduced operating costs
VMI relationships result in significant reduction in operating and administrative costs due to fewer incidences of problems caused by bad data, reduced emergency orders owing to stock-outs, and a more consistent ordering process. Reduced transportation due to fewer emergency orders and fewer returns of ‘dead’ inventory as a result of improved collaboration also help to minimize operating costs. Additionally, suppliers in VMI relationships experience reduced finished goods inventory requirements as a result of reduced demand variability, leading to planning leveled production.
(Learn more about NeoGrid’s VMI Solutions and how we can help you optimize your order and logistics processes.)
- Improved customer relationships
Finally, when suppliers work with an OEM to establish a solid VMI relationship, the supplier becomes more of a partner. The reason is that the two will be working together to find a plan that benefits each party. This close relationship better connects the supplier to the OEM, opening the door for improved communication. Engaging the customer in such planning will also show the customer that the supplier is looking for their best interests – which can only strengthen the bond between the two.
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