Vendor Managed Inventory (VMI) vs. Just in Time (JIT)

How you manage and maintain inventory has far-reaching implications across multiple areas of your business–from budgeting and warehouse space to order fulfillment and customer satisfaction. For many organizations, keeping their own inventory of supplies on location often isn’t feasible because keeping large amounts of materials on hand requires significant upfront capital, and storing them takes up valuable warehouse space. Meanwhile, managing your own inventory also requires time and attention to ensure supplies are adequately stocked and replenished timely, so you never run out. With self-managed inventory, your business assumes the risks and the responsibility of keeping enough supplies on hand. 

Instead, many businesses opt for Vendor Managed Inventory (VMI) and Just in Time (JIT) delivery to meet their inventory maintenance needs, while freeing up time and resources to focus on their core competencies. 

This blog post explains what VMI and JIT are, how they are different, how they work in practice, and the benefits they can provide for businesses. 

What is Vendor Managed Inventory (VMI)?

Vendor Managed Inventory refers to a business practice where suppliers assume the responsibility of maintaining inventory on behalf of their buyers for an agreed-upon period of time. With VMI, the vendor assumes the risk and takes on much of the legwork that would normally fall on the buyer to ensure supplies are stocked and on hand for delivery whenever they are needed. 

What is Just In Time (JIT) Delivery? 

Just in time delivery (JIT) is one of the most effective ways to ensure materials are delivered to exactly the right place at the right time–every time. With JIT delivery, instead of having extra inventory on hand taking up space, stores and manufacturing facilities can get items delivered to them at exactly the time they are needed. For more information on how JIT delivery works, see our recent blog posts. 

What is the Difference between VMI and JIT Delivery? 

True Just In Time delivery seeks to eliminate inventory entirely; meanwhile, with Vendor Managed Inventory, the supplier keeps inventory nearby the buyer’s facility for fast, on-demand delivery. In this way, VMI can provide many of the same benefits to the buyer as JIT (e.g. freeing up warehouse space, saving time, and reducing costs) while further reducing risk of supply chain issues and shortages because the inventory is closeby and contractually maintained by the vendor. JIT principles can be leveraged in combination with Vendor Managed Inventory to both streamline inventory management and ensure fast, on-demand delivery. 

How does VMI Work in Practice? 

Let’s take a look at the following example of Vendor Managed Inventory with a pallet supplier. In this scenario, the customer uses pallets to store and transport products around the world, but they don’t have the space to have unused spare pallets lying around before they’re needed. The customer has contracted a pallet supplier to manage their pallet inventory for them. Here’s how it works: 

• The supplier and the buyer align on how much stock is needed, pricing and payment structure, and a strategy for replenishment. 
• The supplier ships the agreed upon pallets to a warehouse in close proximity to the customer’s facility. At this point, the supplier still owns and is responsible for the materials. 
• When the buyer needs new pallets, the vendor delivers them from the local warehouse to the buyer’s facility, and the buyer finishes payment for the new pallets.

In this way, the customer knows they will have pallets available when they need them–without the space constraints, resource requirements, and capital expense of managing and storing the pallet inventory themselves. 

Benefits of VMI and JIT Delivery 

Save Warehouse Space

With Vendor Managed Inventory and Just In Time Delivery, businesses can save significant warehouse space and reduce their storage costs because the supplier keeps stock available for you in their own warehouse near you. This enables you to save warehouse storage and repurpose the costs or space for other activities. 

Reduce and Reallocate Costs 

With many vendor managed inventory programs, you also are not paying for all of the inventory upfront; depending on your contract, you pay a certain amount to “hold” the inventory for you, and pay for the rest when the supplies are actually delivered to you. This can be a very effective cash flow strategy. In addition, staff that were formerly involved in inventory management can be reassigned to other higher value activities at your facility.  

Invest in New Revenue Streams

When you reduce your capital and ongoing expenses related to inventory, the savings can be reallocated for a wide variety of other revenue-generating uses. For example, by reducing storage, inventory, and warehousing costs with VMI, you can instead invest in new product development or build out additional revenue streams. 

Risks of Vendor Managed Inventory

While VMI can be helpful in reducing the risk that you manage yourself, it doesn’t eliminate risk entirely. Instead, VMI shifts the responsibility of risk mitigation to the supplier. For example, if the supplier doesn’t effectively manage your inventory, you could find yourself out of luck and without supplies. Therefore, it is important to partner with a trusted vendor with a track record of on-time delivery to your area. 

Conclusion

VMI can have massive benefits for your business, saving you costs, time, and space associated with inventory management. When you partner with PalletOne, we work with you to define your pallet needs and always keep the required amount of your pallets available at our nearest facility for on-time delivery. As the inventory is used up, we proactively replenish your stock with new materials so you’ll never run out.