The keys to vendor managed inventory (VMI) success.

VMI (vendor managed inventory) is the process where the supplier manages the customer’s inventory so that the customer has the “right” item in the “right” place at the “right” time to ensure high service levels, efficient and productive operations, and the least amount of inventory tied up unnecessarily. The best VMI programs ensure that the end-to-end supply chain gains with both the supplier and the customer achieving improved results or benefits. VMI is utilized to create customer loyalty, build business with customers, and deliver bottom line results. 

Why VMI?

VMI programs can deliver dramatic benefits for the customer, cash flow and cost. You will gain predictive insights into your customer’s demand so that you can create an operational rhythm with a SIOP (Sales Inventory Operations Planning) process. SIOP aligns and balances your demand plan (sales forecast) with your operational capacities, capabilities, and your end-to-end supply chain. For example, in working with a mid-market healthcare products manufacturer, VMI directly contributed to achieving significant successes with their number one customer.

The manufacturer rolled out a collaborative ordering program with their key customer where the manufacturer determined what to order and ship to the customers’ distribution centers. The customer sent an EDI transaction with daily usage, inventories, and expected receipts to the supplier (manufacturer). They also provided service level expectations, inventory targets, and provided monthly scorecards to track progress. The manufacturer utilized this information and developed a sales forecast for each distribution facility and the customer overall. These forecasts, safety stock levels, lead time expectations and other planning variables were fed into a distribution and replenishment planning system which provided recommended replenishment orders. The demand planner followed up on exceptions and gained Sales and customer insights, and the VMI planner reviewed and updated recommended orders and optimized them for operational, warehousing and freight efficiencies while ensuring high service levels. Significant results were achieved:

• Recognized by #1 customer as “supplier of the year”
• Increased sales revenues by 20% on key product lines
• Became “part of the customers’ organization”, thereby a stronger supply chain partner
• Doubled inventory turns (reduced inventory levels)
• Improved customer service levels to 98%+ (OTIF on-time, in-full, OTD on-time delivery)
• Reduced lead times
• Improved costs and margins

We’ve worked with clients across multiple industries and company sizes from both the supplier and customer point-of-view to design and rollout VMI programs. The most successful clients had four keys to success in common: the 4 P’s – people, process, partnership and provider.

#1) People: The right people are your #1 asset. Let’s start at the top. As with any significant initiative, senior leadership can make or break your VMI program. They must provide commitment and support, have a high-level understanding of the value that can be achieved through a VMI program and be able to explain the whys. By understanding the whys behind a VMI program, the executive can tie individual goals to the big picture, and provide support (such as supply chain consultants, trusted advisors, and technology resources) and tools as needed to ensure success. For example, since the healthcare products manufacturer had senior leadership support, the customer and bottom-line impacts were understood and valued, which resulted in the appropriate resources and funding allocations.

The “right” VMI planner(s) is critical. In our healthcare products manufacturer, we started with an available resource; however, the appropriate capabilities didn’t exist, and so service levels suffered initially. We quickly upgraded the VMI planner with a person with a customer orientation with an analytical skillset, and success followed. The ideal candidate will be analytical, enjoy optimizing among multiple, competing variables, self-confident (as it will be required when at the center of competing interests), customer focused, detail-oriented with a passion for follow-up, and can see the big picture. We aren’t asking for a lot!

Lastly, support functions such as Customer Service, Planning, Sales, Marketing, Product Managers, and all SIOP owners can be integral to VMI success. 

#2) Partnerships: Partnerships circle back to the critical importance of people. In essence, you must have the “right” people on your extended team including your supply chain and technology partners. To ensure VMI success you must find “win-win” partnerships. Start with your supply chain partners. The manufacturer could create the best orders to deliver “win-win” results; however, if the customer doesn’t trust the supplier, have the appropriate systems to receive EDI transactions or update customer/ supplier portals, or collaborate on metrics for success, your program will fail to deliver the expected results. Instead, you must create a close partnership and collaborative relationship with your customer.

Instead, build trust with your customer. Start small with a pilot, ensure timely communications, and address bottlenecks proactively. Look for opportunities to create win-win ideas. It is always best to share success and accept responsibility for issues. Collaborate on sales forecasts. This was one of the keys to success for the manufacturer as the demand planner ran exceptions by the distribution centers and asked for feedback and insights. Set goals collaboratively and review metrics scorecards together. When both the customer and supplier are aligned on win-win metrics, success follows. View your key customers and your suppliers as an extension of your company and supply chain. With a partnership, you should be able to turn 1 + 1 into 22 instead of 2, meaning your returns will be exponential over what you will achieve on your own.

#3) Process: To ensure flawless execution of your VMI program, process disciplines are of paramount importance. Achieving three competing goals simultaneously (customer success, margin improvement, and accelerated cash flow) is not easy, yet it is doable with a focus on business processes. Start by rigorously following the traditional plan, do, check, act (PDCA) model. It has been shown that although the majority of people spend the majority of their time on the “do” of plan, do, check, act, the successful implementers spend a very small portion of time (10%) on “doing”. Instead, it is plan (70%), do (10%), check (15%), and act (5%). As this implies, follow-up/ audit is also essential for success. Remember to continuously improve, stay connected with your supply chain partners, and don’t sit still while your competition passes you by. 

In addition to following a PDCA model with flawless execution, you must upgrade your business processes as needed. Demand planning and replenishment planning are the core processes to support VMI. Either or both might require an upgrade. For example, when the manufacturer developed forecasts, they started at a detailed level. It is tempting to ensure all input is incorporated at a sku level by facility; however, the more detailed your forecast, the less accurate the forecast. Thus, the process had to be upgraded. Evaluate each unique situation and determine the best approach to forecasting. For example, if you have basic forecasting capabilities and tools, you’ll use a different approach than if you have sophisticated systems. If you have promotions, you’ll require a different capability than if you have an engineer-to-order (ETO) product. If you have scarce information, you’ll utilize a different method. In the manufacturer’s case, we developed the forecast at the customer’s distribution center level by product line, and the forecasting software calculated the details. Instead, the emphasis was on exception management and incorporating customer feedback. To learn more about forecasting best practices, refer to our article, “Creating Predictable Revenue with Demand Planning Best Practices“. 

#4) Provider: Your software, system, and /or technology providers are also critical to success. For a successful VMI program, you might involve the following types of providers: EDI (electronic data interchange), ERP (enterprise resource planning), customer/ supplier portals, Demand planning (sales forecasting) software, VMI / replenishment software, advanced planning software, CRM (customer relationship management) software, e-commerce software, quoting system software, business intelligence software (BI), artificial intelligence (AI), and other advanced technologies. It would likely be extreme to roll out all of these software options to successfully navigate VMI. Typically, you will have 2-3 of these software options; however, we have worked with both extremes (many or just ERP and spreadsheets) successfully.

Stay away from getting sucked in by bells and whistles if you need to select an additional software for your VMI journey. The manufacturer needed a VMI software (demand planning and replenishment planning) software to support their customer’s complexity. Refer to our ERP selection process criteria as most of the strategies apply to most technologies. The bottom line is to select a software with “best fit” functionality and flexibility to achieve your key business requirements and a partner that will be a true partner in ensuring success. Since 80% of software implementations fail to achieve the intended results, you must choose your partner wisely as you will run into challenges.  For example, the manufacturer found an experienced VMI partner with not just “best fit” software functionality but also VMI expertise which led to a significant return on investment (ROI). 

The Bottom Line

After these fundamentals are in place, you can drive additional customer intimacy and supply chain partner efficiencies with additional collaborative upgrades. For example, the manufacturer increased service levels with the initial rollout and expanded the benefits down-the-line. By focusing on the forecast exceptions and optimizing safety stocks, the customer’s inventory decreased. Simultaneously, the manufacturer upgraded the replenishment planning process and optimized orders in multiple stop truckloads to decrease internal freight costs while maintaining a high rating on the customer scorecard. In addition, the manufacturer reviewed inventory levels across internal locations and customer locations and reallocated as needed to mitigate costs and ensure service levels while reducing internal inventory levels as well, thereby achieving a win-win.  

As you roll out VMI, focus on the 4 P’s. Customer value and bottom-line results will follow.

Did you like this article? Continue reading on this topic:
Supply Chain Collaboration & VMI to Get Ahead of Economic Challenges

© Lisa Anderson Original article published April 2013, updated April 2025.