Vendor managed inventory or VMI programs are where the Supplier stocks product at certain agreed locations for the Buyer to pull the products when needed for their use.
Standard Buyer purchase templates usually need to be modified to implement VMI programs:
- Instead of ordering, the Buyer Provides forecasts.
- Instead of having delivery at the Supplier’s dock, delivery occurs when the product is pulled from the Hub.
- Instead of the inventory needed for production being held by the Buyer, it’s held by the Supplier.
- The Supplier’s ability to get paid is based not when it left its dock, but when it was actually pulled.
- The warranty period for the product that traditionally would be measured from when the Supplier ships it, needs to be measured differently based on when it was pulled or the lag time it will spend in transit and in the Hub needs to be built into the warranty.
- Because the Supplier is responsible to get it to the Hub, all shipping costs and risk of loss transfer to the Supplier so the Suppliers costs are impacted.
- If a third party manages the Hub, additional issues of insurance and risk of loss at the Hub come into play.
Since the Buyer isn’t actually purchasing the product until the pull, Suppliers also are concerned with
- Liability for custom product in the event of a termination of the program
- Obsolescence of a product
- The impact major reductions in volumes of consumption may have on the inventory levels
- The accuracy of Buyer’s forecasts and the cost of holding inventory that isn't consumed.
- Their ability and costs to do re-balancing of inventory for standard products (re-deploy it for other customer use).
- Buyer’s liability when pulls simply do not happen as forecasted.
Most VMI negotiations will focus on these issues and the extent and nature of the product profile (Items held, quantity).
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