Vendor managed inventory adds value to both buyers and suppliers

VMI (vendor managed inventory), an inventory management solution, helps the buyer to get spare parts based on demand. Suppliers including spare parts OEM and machinery OEM provide VMI services. The technology providers are the ones who provide enterprise software solution to help suppliers keep track of inventory status of buyers in real time. The buyer consumes the product at the end.

VMI procurement models:

The suppliers manage the inventory of spare parts either at buyer’s location or at third-party’s location that is closer to the buyer’s place.

Procurement model 1:

(Vendor managed) In this model, the machinery OEMs avail the VMI service from their suppliers for the spare parts to be kept on-site for uninterrupted production-run. It is one of the criteria in selecting their suppliers. The suppliers too offer VMI service to their large buyers. Predominately, the inventory is managed at buyer’s location.

Procurement model 2:

(Third party managed) Instead of machinery OEMs, a third party performs the VMI functions. Here, the inventory of spare parts is kept at buyer’s location or third party’s warehouse near the buyer’s location.

a. VMI at third party’s warehouse:

The buyer raises a purchase order with the third party. The order is executed through just-intime approach. The third party player provides the daily inventory status of parts being stockedout. The machinery OEM replenishes the inventory at the third party’s warehouse as per the need.

b. VMI at buyer’s location:

In this case, the third party vendor just acts as an inventory managing service provider. Instead of suppliers, he maintains the inventory at buyer’s location. He places the order with suppliers as and when the inventory of individual parts reaches its minimum level or reorder level whichever is agreed-upon in the contract.