As an eCommerce business, staying ahead of customer demand for your products is no easy task. With inventory management being a vital part of any successful operation, it’s essential to stay updated on new techniques and technologies that can help optimize the process. One increasingly popular option among businesses today is eCommerce vendor-managed inventory (VMI), which offers several great advantages over traditional practices.
In this blog post, we’ll explore what VMI is and how it works, explaining why you should consider making the switch in your own eCommerce business. Read on to learn more!
What is vendor-managed inventory?
Vendor-managed inventory (VMI) is a type of inventory management where a manufacturer or supplier manages and maintains inventory for a company (or buyer). Still, the actual stock is kept on the buyer’s premises rather than the supplier’s.
In a VMI arrangement, the supplier oversees inventory replacement and storage expenses on behalf of the business while the latter retains ownership of the inventory.
In contrast to a traditional supplier-buyer transaction, VMI is much tighter cooperation.
The eCommerce company would need to provide the supplier access to its inventory data for VMI to function. Following that, the supplier would utilize this data to decide on order quantity and frequency for replenishment.
What distinguishes VMI from other inventory management strategies?
Once a product has been ordered, shipped, and received, it is often up to the eCommerce company to decide how to keep, manage, and restock inventory.
A company may keep inventory at its home, workplace, or storage facility. However, inventory is typically held in a rented warehouse where they are in charge of overseeing the supply.
Another strategy is collaborating with a third-party fulfillment (3PL) provider to handle order fulfillment and inventory management on the company’s behalf. Based on this model:
- Inventory is held at the fulfillment center(s) of the 3PL, and the business has access to merchandise management data as the 3PL receives, stores, and sends inventory to customers and other companies.
- The 3PL should also provide real-time inventory data and reorder point notification capabilities, allowing the firm to make timely replenishment choices.
With eCommerce vendor-managed inventory, the company keeps the goods in their warehouses while the supplier maintains it.
Who should use eCommerce vendor-managed inventory?
eCommerce vendor-managed inventory is an excellent alternative for a wide range of businesses and is even regarded as standard in some sectors of the retail industry. It’s a widespread technique in the consumer products and electrical sectors.
However, it is best suited for internet sellers with enough physical storage space and who wish to avoid handling a large number of SKUs.
Big-box retailers such as Amazon, Walmart, and Home Depot rely on VMI to avoid manually placing purchase orders. This is a suitable alternative for them because they deal with millions of SKUs and collaborate with many third-party merchants.
When VMI is not the most appropriate approach
While VMI is a cost-effective inventory management solution for many firms, it is not always the best option in the following cases.
- When selling high-priced commodities.
Jewelry, pricey industrial components, and luxury products require greater protection and are hence unsuitable for vendor-managed inventory.
- When your market is fast changing.
In most direct-to-consumer marketplaces, having total control over your inventory is critical so you have precise data on sales predictions and market developments to enable you to maintain a healthy supply chain and make quick adjustments yourself.
As a result, for most direct-to-consumer firms, a vendor-managed inventory system isn’t the best solution.
- When you can’t afford enough warehouse space
In a vendor-managed inventory system, the supplier may be in charge of inventory management. However, you are still in charge of inventory storage. And warehouse space may be expensive.
This makes the eCommerce vendor-managed inventory system difficult for specific organizations, especially if they can’t afford to physically keep significant volumes of items frequently required to balance the expenses associated with VMI and make it worthwhile to invest.
eCommerce organizations are continually working for better inventory management systems and experimenting with alternative inventory models to remain competitive. eCommerce vendor-managed inventory is one option to examine for better inventory management. Try our inventory management app BackOrder today for more sensible inventory management.