Vendor Inventory Services Q&A: Common Myths and Hidden Benefits

Whether referred to as VMI or VIS — essentially a back-end technology distinction — the fundamental concept of vendor-managed inventory services remains consistent. 

However, there are still various misconceptions and myths surrounding this inventory management approach. We sat down with Justin Drage, Vice President of Partner Management at iQmetrix and former Chief Growth Officer at inventory management partner VoiceComm, to tackle this topic with a Q&A.

Recent conversations with partners have turned up insights that there are still some common retailer misconceptions about vendor inventory services, or VIS — also known as vendor-managed inventory (VMI) — that prevent retailers from using it. Can you give a brief overview of what VIS is, and how it delivers value to retailers that use it?

VIS is software that integrates with retail management systems to give retailers better control over their stock by allowing them to more easily track products, prevent stock-outs and overstocks, and better align resources across the supply chain.

If I’m an inventory manager who is responsible for a large number of stores and I’m doing my purchasing the old-fashioned way — by looking at sales and inventory on hand, creating purchase orders, and sending them to a supplier to fulfill — that won’t necessarily address the most important issue, which is: does that supplier actually have the inventory I need? 

Without that visibility, I’m just firing purchase orders into the void, because I don’t know what they have on hand unless I do a lot of extra work to ask suppliers to send me all of their current stock and figure out orders from that, which doesn’t really happen. On the flip side, without VIS, my supply chain partner doesn’t know what I need because they don’t have access to my inventory. If you’re doing ordering on your own and just sending a vendor POs, how would they know to keep this many for you if you haven’t communicated with them?

That’s one of the biggest advantages of VIS — you basically extend your inventory staff to your supplier staff, because you’ve got a group on the supply chain side that is also helping to manage your inventory for you.

That helps managing inventory — but does that require giving up control over your inventory? Given that one common perception of using vendors to manage inventory is that the retailer loses control. 

Not at all. 

When I was at VoiceComm, the way we handled orders is that retailers have the ability to review all orders before they’re completed. So we would look at sales, trends, and inventory on hand to build orders, and if you had 1,000 stores, we would build 1,000 orders for you on the date that you had identified for us and send them to you for review.

Then retailers can still go through those orders and make changes. For example, maybe you know that there’s a Motorola device that had been selling really well, but now you’re not able to get more devices so you don’t want additional cases for that device. You still have the freedom to say, ​“I don’t want to replenish this item,” ​“Mark this as do not order,” or ​“Hold off on this item for two weeks.” We’d then make those changes and only push the order after approval. 

This means retailers keep all of the control, and VIS is just taking busy work off their plate.

Another big concern we heard about was fear that VIS could replace inventory management jobs. Can you speak to that?

VIS creates visibility into the supply chain, but it doesn’t replace the need for inventory managers, who are in the best position to make decisions for their business.

VIS creates alignment with supply-chain partners by allowing them to see your inventory and help determine which inventory goes best where. It also puts you at the front of the line before businesses that submit their own purchase orders, because now your suppliers have stake in the game. If an item isn’t performing for you, or if you’re running short on critical stock, your supplier becomes part of solving that problem. It aligns the resources on both sides, which is a huge advantage for retailers and suppliers.

Another example is return rights. If you’re a retailer who is sitting on a lot of Product X that hasn’t sold in a month and the return rights with the vendor that sells the product are coming up, your VIS integration partner can send you an alert about the underperforming product. Then you can decide what makes the most sense – do you run a training for your team on selling the product, or do you send it back to the supplier for credit?

So, VIS isn’t replacing the inventory manager role, because there still needs to be some point of contact that is having these discussions, creating strategy, picking SKUs, determining fill rates, and corresponding with supply chain partners. What it does is add to the capabilities of that role, because now there’s a whole team of people running analytics and helping you manage your inventory to make sure it’s as effective as possible.

Are there any other common hesitations that retailers have about using VIS?

Another issue is fear that VIS partners would have a different goal or agenda than retailers. We might hear something from retailers like, ​“Our goal is to manage inventory as low as possible so we don’t have excess inventory on hand, because it’s cash out of our bank account — whereas it’s your [the VIS partner’s] goal to maximize sales so you’re going to try to push all these products in.” 

And that’s another area where return rights came in. In my experience at VoiceComm, it really did us no benefit to overstock our partners, so those return rights help to build trust and understanding that VIS partners are aligned with retailers’ needs. It makes sense for VIS partners to make sure retailers have the right products at the right place and the right time, because otherwise it just amounts in losses in the value chain.

What are some of the biggest benefits to retailers of using VIS that businesses might not be aware of?

VIS creates much smoother inventory trends than what you see with businesses that don’t use it, where it’s all spikes and valleys, spikes and valleys, and they’re constantly struggling and scrambling for inventory. With VIS, you end up having fewer inventory losses because you have somebody else helping you manage the bad SKUs.

Also, VIS tends to come with better return rights than standard purchasing. When you have items that aren’t selling well, it’s in your supply chain partner’s benefit to get those out of your stores, because they make money when you move inventory. So if a product is sitting there stagnant, everyone in that value chain is losing out on their ability to make money.

On the supply chain side, the ability to view ongoing trends helps retailers make smarter purchasing decisions and respond faster to supply chain disruptions. Say if a business is low on stock because a promotion caused a surge in sales, supply chain partners can start working on quicker ways to get the inventory, or dropping supplementary purchase orders with their own suppliers who have the inventory. 

It also helps retailers make sure their shelves are stocked with important items. Say you’ve placed an order, and a VIS partner can see that you need 1,000 of a product, but the supplier only has 970. They can either determine where to short those 30 — either stores with lower sales of that item or with higher stock levels of the item — or they’ll supplement with another approved item.

Lastly, VIS integrated alongside Dropship can let retailers extend their product offerings without having to have more space in their store. This lets retailers improve CX by offering a wider range of products, without having to take on the extra risk that comes with additional product stock on-hand. And integrating Dropship with VIS makes sure product availability and pricing updates across all systems instantly.