Question

Vendor Managed Inventory (VMI) is a business model where the buyer of a product provides infor-mation to a vendor of that product and the vendor takes full responsibility for maintaining an agreed inventory of the material. Critically discuss the pros and cons of VMI.

Answer 1

Vendor managed inventory.

Vendor managed inventory is a process or a practise in which the manufacturer is generally responsible for the inventory of a distributor. In normal inventory the buyer makes all the decisions regarding his order size but in vendor managed inventory the buyer shares the decision with a vendor who then determines the order size.p

Advantages

1. Seen into the customers needs the vendor can prepare in advance for production,transportation etc.

2. Demand information will be known in advance and improved forecasts will be known by the vendor.

3. Vendors can anticipate customers order and as a result smaller and planned frequent shipments can be done .

4. In this method customers will be provided with better product availability.

5. Products will always be in stock . In case the inventory do not sell the vendor will repurchase the products.

Disadvantages

1. The customer will be left out if the vendor is not able to meet the customers needs in a regular basis.

2. Not all products can be sold through vendor management. For example seasonal products cannot be suggested for VMI because the demand cannot be rightly judged.

3. The complete control and decision making goes to the vendor.

4. Miscommunication between the retailer and vendor can lead to low or no inventory.

5. Sudden hike in the product demand will also be a problem for both retailer and vendor.