This is an inventory management practice in which a supplier of goods, usually the manufacturer, is responsible for optimizing the inventory held by a distributor.
In traditional inventory management, a retailer (sometimes called buyer) makes his or her own decisions regarding the order size, while in VMI the retailer shares their inventory data with a vendor (sometimes called supplier) such that the vendor is the decision-maker who determines the order size for both.
Thus, the vendor is responsible for the retailer’s ordering cost, while the retailer has to pay for their own holding cost. This policy can prevent stocking undesired inventories and hence can lead to an overall cost reduction.
Moreover, the bullwhip effect is also reduced by employing the VMI approach in a buyer-supplier cooperation. As replenishment frequencies play an important role in integrated inventory models to reduce the total cost of supply chains which many studies fail to model it in mathematical problems.
A third-party logistics provider can also be involved to make sure that the buyer has the required level of inventory by adjusting the demand and supply gaps.
As a symbiotic relationship, VMI makes it less likely that a business will unintentionally become out of stock of a good and reduces inventory in the supply chain.
Furthermore, vendor (supplier) representatives in a store benefit the vendor by ensuring the product is properly displayed and store staff are familiar with the features of the product line, all these while helping to clean and organize their product lines for the store. VMI can also decrease the magnitude of the bullwhip effect.
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