Vendor Managed Inventory and EDI

Vendor managed inventory (VMI) is a method for optimizing supply chain fulfillment in which the supplier takes on the responsibility for maintaining their customer’s inventory level. VMI has been used successfully by many large retailers to reduce inventory costs and improve availability of product.

VMI is a collaborative relationship that ensures that items hardly ever run out of stock. This system is oftentimes combined with the use of Electronic Data Interchange (EDI) documents. Using standardized EDI formats for data ensures that information is transmitted and received in a format that is usable and that assists the retailer and supplier systems in utilizing it correctly. VMI combined with EDI can make for a very efficient business process.

The Relationship

The symbiotic nature of VMI relationships tends to build loyalty between the buyer and the supplier. VMI arrangements have benefits for both of the parties involved. The retailer – the buyer of the products – receives the assurance that they will not run out of an item that sells very well and does not have to worry about ensuring that the item is in stock. The supplier has visibility into store sales and can make sure that deliveries keep pace with sales activity.

Rather than the purchaser having to keep track of how many units are available on the shelf, the vendor takes care of it by tracking deliveries and sales. In most cases, EDI sales data is used to determine when more product is needed. In some cases, a shipping company or logistics company is involved in the process as well.

How is an EDI Solution Used in the VMI Process?

One of the advantages of a VMI system is that an 850 purchase order document is not required. Instead, the process starts with the 852 Product Activity Data document, which is also used for sales reporting from the retailer. The 852 report streamlines the fulfillment process and makes it much easier to ensure that items remain in stock by providing accurate and up-to-date information. The supplier can determine which items may need to be ordered and which items may not need to be delivered at all.

An EDI solution helps to ensure that deliveries are made on time and that invoices are paid without delay. These benefits are typical of any type of arrangement that utilizes an EDI solution but, in a VMI relationship, the streamlining effect of electronic data formats and good communication are particularly noticeable and beneficial.

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