The vendor managed inventory definition is simply a supply chain arrangement under which manufacturers or suppliers handle, manage, and optimize their inventory once it is in the control of a purchaser. Simply put, it is an inventory management method in which inventory is replaced by the purchaser or the reseller without them ever having to initiate a direct purchase order. This guarantees a smoother workflow, faster turn-around, and less wasteage. The advantages of using this inventory management method is that it can better position vendors for future growth, reduce inventory holding costs, streamline distribution and logistics, improve profitability, eliminate third party risk, and expedite return on investment. To put it simply, this type of warehousing is considered to be the most cost effective and efficient method of inventory control in use today.
There are many benefits to vendor owned inventory management systems and some of these include: reduced costs, higher capacity, more control, faster inventory turnover, elimination of third party risk, improved order processing, reduction of non-recourse risks, and an increase in flexibility. These benefits are primarily due to the fact that vendors own their inventories, which reduces the need for third party financing. Another benefit of this type of warehousing is that it requires little inventory holding time, as there are no restrictions placed on quantities. Also, because there are no contracts or commitments involved, there is no need to track inventory levels and delivery times. Vendors may also charge a per item fee to support their own operations, further alleviating the need to contract for additional third party vendors. Lastly, vendors are not restricted by licensing agreements and can sell to individual customers directly.
In order to understand why this inventory management arrangement is beneficial to companies, it is important to understand the relationship between a manufacturer and a retailer. The manufacturer manufactures products that are required by a retailer to fulfill their needs, but at a higher cost. In return, the retailer must make purchases from the manufacturer in order to fulfill their orders. By using a vendor managed inventory warehouse, the retailer is able to reduce their total inventory holding expense, but still receives products that they need to sell. It is this combination of cost effectiveness and sales efficiency that makes managed inventory ownership a viable option for many manufacturers and retailers.
