What is Vendor Managed Inventory (VMI) and how does it work?

VMI stands for Vendor Managed Inventory. VMI systems are a hot topic in the supply distribution world right now. But what is VMI, and how does VMI work?

Quick Answer – What is VMI?

VMI stands for “vendor managed inventory” (also known as “customer managed inventory”). VMI is system that allows customers to quickly place a replenishment order for goods. Rather than making phone calls or ordering using a web form, the customer can use a barcode scanner to scan the items, enter a quantity, and then send the order (via Wifi or cll network) through the barcode scanner to their vendor.

Easy, right? Read on to find out more about how VMI works.

Life Before VMI

Vendor managed inventory is a simple way of creating replenishment orders for a distributor’s products.

Imagine that you are a distributor of toilets. Your customers regularly place orders for your goods through your sales team, either in person or over the phone.

The normal process for re-ordering might go something like this:

  1. Your customer, Toilets R Us, realizes that they are running low on the UltraMega Flush5000 model. Pat (the manager) is notified and writes down the product name on a piece of paper.
  2. Later in the day, Pat calls your sales department and speaks to Jean, your salesperson. Pat explains that Toilets R Us needs to reorder the UltraMega Flush5000. Jean offers to come out to the Toilets R Us warehouse.
  3. Jean arrives later that day at Toilets R Us and spends some time talking with Pat. Jean hands over some new product brochures, and checks to see what other toilets might need to be re-ordered. It turns out that Toilets R Us is also in need of some more Lo-Flo 6722s. Jean writes this down in a notebook and heads back to your headquarters.
  4. Back at your distribution DC, Jean gives the toilet model numbers, order quantities, and customer information to Martha, who manages your ERP. Martha enters the order into the system first thing the next morning, and the order is picked and shipped to Toilets R Us 24 hours later.

This entire process probably took a couple of days. Not only is this inefficient, it’s very prone to mistakes.

During a simple order like this one, there are any number of times that human-introduced error could have resulted in lost time and money. Take the toilet model numbers, for instance. What if Jean’s handwriting is bad enough that Martha misreads the Lo-Flo 6722 and orders a Lo-Flo 6522 instead?

If you’ve ever worked in distribution, you know that there are countless ways to waste time and money when placing customer orders. VMI is a way to streamline the process so that replenishment orders can be placed quickly, efficiently, and without costly errors.

How VMI Works

VMI may be included as a part of a warehouse management system (WMS). In this example, we’re going to talk about Latitude WMS, because, well, it’s our product and we understand how it works. If you are new to warehouse management systems, you might want to read our introduction to WMS.

Vendor managed inventory is a module that distributors can use to make placing customer orders easier, faster, and more efficient than ever before, especially for customers who order the same products consistently.

Let’s take the Toilets R Us customer. Assume that they stock 20 different toilet models from your distribution business. Because you use Latitude WMS to manage your inventory and other operations, you can also use the Latitude VMI module to help your customer (or your sales team) create quick replenishment orders using a mobile scanning device.

We’re going to discuss an example that bypasses the sales team altogether.

Customer Managed Ordering

Your customer, Toilets R Us, realizes that they are low on the UltraMega Flush5000 model of toilet.

  1. The manager, Pat, takes a mobile scanning device that you have provided (usually an Intermec CK3) into the warehouse. Pat opens an order on the scanner, and then scans the barcoded label on the shelf next to the product.
  2. Pat enters the number of toilets that she wants to order. There is a default order quantity of 10 set up for Pat’s account, but Pat overrides it, because she knows that an order for 40 of the Ultra Mega Flush5000 model will be coming from a city contractor within a week.
  3. Pat verifies and completes the order on the CK3. The CK3 wirelessly transmits the order.
  4. The order is sent up to your distribution warehouse via Latitude WMS. The order is checked for errors, and then passed up to the ERP system.

Within this scenario, there is still room for human intervention – it’s not like the machines have taken over completely. For starters, Pat is able to override the default order quantity – that may have just been put in place for convenience.

Jean, who owns the Toilets R Us account, will receive email notifications from the WMS every time an order is placed by his customer. Jean can call Toilets R Us to double-check that they really want to order 40 UltraMega Flush5000s, because it’s a much larger order than is normally placed by the client.

Customer-managed inventory replenishment is also ideal for situations in which a distributor’s sales team is not allowed inside a customer warehouse or retail location. This might be due to insurance regulations, union labor laws, or some combination of the two.

Maintaining the Sales Team

Of course, many clients prefer to maintain a sales team that can handle placing customer orders. Jean could easily be tasked with using the scanner to build the order during normal sales visits.

Sales teams find that using the VMI process with a mobile scanning device reduces errors and downtime significantly. There’s less handwriting to worry about, fewer instances during which information can be miscommunicated. The order is placed right on the spot at the customer location, and transmitted wirelessly in real-time.

Benefits of VMI

In addition to saving time and virtually eliminating customer order errors, the biggest benefit to VMI is that your customers will LOVE IT. You give customers the ability to simply scan and wireless transmit an order.

It’s fast, and it’s simple. It’s the reason that E.B. Horsman & Son implemented Latitude VMI in their distribution business – VMI helped them land a contract with one of the biggest aluminum producers in the world!

How you would implement VMI in your distribution business is really up to you and your customers, but if helping your clients place error-free orders sounds good to you, don’t hesitate to contact PathGuide Technologies at 888-627-9797 to find out how Latitude WMS and VMI can help you land new accounts.

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