VMI vs. Traditional Inventory Management: What OEMs Need to Know

It’s no secret that inventory management is growing increasingly complex. Take your supply chain – the more parties and transfer points involved, the greater the likelihood of breakdowns and delays. How can you guard against the impact of natural disasters and other supply chain disruptions when determining the parts you need to stock up on?

This reality has original equipment manufacturers (OEMs) reckoning with how they manage their inventory. Many manufacturers are turning away from traditional inventory management and toward vendor-managed inventory (VMI).

Maybe you’re thinking about joining them. This post outlines what you need to consider before deciding whether to adopt VMI.

Differences Between VMI and Traditional Inventory Management

Traditional inventory management is an internal, typically facility-based endeavor. It gives manufacturers control over their shelves – which and how many products they have on hand. OEM staff rely on internal forecasting and demand planning to determine which parts to replenish, when and by how much.

This leaves inventory control – and inventory spending – in the OEM’s hands, which many find comforting. That comfort of being in control seems worth the higher associated operational costs and carrying charges.

But these systems have their challenges. Fluctuations in buyer demand, inaccurate forecasting, and other miscalculations can lead to too much inventory on shelves, which ties up capital. On the flip side, it can leave you with too little inventory, potentially disrupting production.

VMI, meanwhile, shifts those responsibilities to suppliers.

Suppliers operate these systems through sophisticated software platforms that provide real-time visibility into stock levels and consumption patterns. They also estimate demand and even can schedule deliveries.

Determining if VMI Is Right for Your Business

Vendor-managed inventory is best suited for companies that understand its value and are willing to share data with their supplier partners. It’s ideal for large- or medium-sized companies that have a stable demand for products and typically use between 50 to 1,000 SKUs in their assembly process.

Why these parameters? Manufacturers of this size often have complex supply chains and a lot of inventory to track. Stable demand is key because VMI relies on accurate forecasting to maintain optimal inventory levels. And the SKU range matters because VMI is most efficient when managing a moderate number of items.

Choosing the Right VMI Partner

Selecting the right partner requires you to look beyond pricing. The right partner can consolidate your C-class component supply chain, source globally, handle quality pre-approval, and minimize receiving and storage costs. This last bit is important, as VMI programs can help reduce on-hand inventory carrying costs by up to 40%.

Look for a VMI partner that’s ISO 9001-2015 certified at its manufacturing and distribution facilities. This is a good sign that the facilities are organized for optimal efficiency and employees follow proper procedures to deliver safe, quality products.

Partners you consider should also be able to demonstrate total cost of ownership (TCO) savings, showing how they can optimize your entire supply chain for greater efficiency and profitability.

Transitioning to VMI takes careful planning and budgeting. You must ensure your technology integrates with supplier systems and supports real-time data sharing.

In addition, your staff training must address both technical and cultural shifts that the new system creates. This includes information sharing and more balanced relationships with suppliers. Be open with your employees about how these changes will affect their jobs and what they can do to prepare for them.

Measuring VMI Program Success

Your VMI partner should provide easy access to real-time inventory levels, orders and consumption data for clear visibility in supply chain health.

Tracking KPIs is essential for determining the success of your switchover. Be sure to monitor data points such as:  

• Inventory turnover rate  
• Days of inventory on hand  
• Order fill rate  
• Backorder rate  
• Inventory carrying costs

This data helps everyone stay informed and proactive.

Getting Started With Vendor-Managed Inventory

Start exploring a transition to a VMI by identifying your biggest inventory challenges and reviewing your technology stack. Conduct pilot programs with select suppliers to test VMI implementation while maintaining traditional systems elsewhere.

These pilot programs give you snapshots of the benefits and challenges of a changeover. Look for suppliers with expertise in your industry as well as solutions like on-site project management, value stream mapping and dock-to-dock stocking programs to help maximize uptime and boost your bottom line.

See how Birmingham Fastener’s fully integrated inventory management services can help you meet production demands and avoid delays.