Vendor Managed Inventory

Advantages of the ZUP system (VMI) ^[1] :

• reducing the risk of shortage of goods from the buyer;
• lower inventory levels at the buyer;
• reduced inventory levels at the seller.

Such advantages are achieved by increasing the transparency of stocks in the entire supply chain of the supplier and the consumer, and, thus, the possibility of a timely response to changes in demand due to the timely delivery of products to each warehouse or each customer outlet. As a rule, the supplier better understands the behavior of his goods in the market and reacts faster to a decrease in the inventory level of the customer than the customer himself. The supplier also has the ability to deliver without receiving an order from the customer or prior agreeing on the delivery, which is a significant amount of time with the usual replenishment system in the supplier-customer chain.

An important part of such transactions is the transition from the buyer to the supplier of the risks of obsolescence of the goods in the customer-owned warehousing or sale points. This is done either by returning the buyer to the supplier of obsolete goods (selling back), or by transferring ownership of the goods at the time of its subsequent sale by the buyer to the customer or consumer. In fact, the buyer only saves the goods of the supplier, and such a scheme of work can be described by a consignment agreement. A special case of ZUP (VMI) is the so-called scan-based trading ( SBT ), or scan-based trading . This method provides for the supplier’s responsibility for the product and its inventory with the buyer up to the moment it is scanned at the time of sale to the next customer.

This business model has been successfully used by Wal-Mart and other major retail chains in their relations with their suppliers ^[2] . Suppliers of petroleum products use a similar system to provide fuel for the network of petrol stations they serve. A similar practice is already widely used in Russia and Ukraine by leading companies supplying consumer goods ( FMCG ) in relations with their distributors.

VMI helps improve mutual understanding between participants in the supply chain, making them competitive. The use of Electronic Data Interchange formats, related software and statistical forecasting methods ensures maintaining low inventory levels in the supply chain while ensuring a high level of service.

In addition to the benefits, there are also a number of organizational problems arising in connection with the introduction of VMI ^[3] :

• loss of inventory control (risk of supplier error, which is more difficult to calculate and verify);
• demotivation of sales managers due to the degradation of the bonus system, depending on the activity of sales managers (introduction of the VMI system eliminates such incentives);
• strong dependence on the technical support of the process (including the supplier of the system implementing the VMI functions);
• the risk of losing market share due to a decrease in current stocks (in a situation where a shelf at the point of sale is actually used as a warehouse, a decrease in inventory may lead to a smaller volume on the shelf, which in turn will lead to a decrease in market share).

• Supply Chain Management
• Electronic Data Interchange

• Tempelmeier, H. (2006). Inventory Management in Supply Networks — Problems, Models, Solutions, Norderstedt: Books on Demand. ISBN 3-8334-5373-7 .
• Franke, PD (2010). Inventory for High Value Parts | ISBN 978-3-7983-2211-0

• Supplier-managed stocks // supply chain management encyclopedia, GSOM SPbU