Yes, a vendor can manage a customer's inventory. This arrangement is known as Vendor Managed Inventory (VMI). Whether this will result in a superior outcome over traditional self-managed inventory depends on the vendor's capabilities and the particular management challenges. Managing inventory is a key challenge in supply chain management. Businesses have to balance product availability with the use of valuable working capital. Having the minimum amount of inventory to meet demand is typically the preferred inventory management strategy. Less inventory means less money tied up, less space and handling requirements, and less risk of spoilage or obsolescence. On the other hand, insufficient inventory creates missed sales opportunities and customer dissatisfaction. Not having the required inventory in a manufacturing setting, also known as Maintenance, Repair, and Operations (MRO), can cause costly work stoppages.
Businesses can optimize inventory in the traditional supply chain arrangement in many ways. Vendor Managed Inventory and Consignment are two alternative ways businesses tackle this problem.
In Vendor Managed Inventory (VMI), the vendor is responsible for managing, optimizing, and replenishing inventory at the buyer's facility. This arrangement reduces the Bullwhip Effect because the vendor has direct access to inventory information and sometimes the buyer's exact sales quantities. It reduces the risk of stockouts and assists in optimizing inventory levels. It can also reduce the associated carrying and administrative costs of the buyer.
VMI, however, reduces the control the buyer has with regard to inventory and it may become overly dependent on the vendor for inventory management. There is also a potential for misalignment if the supplier is unaware of changes in the buyer's objectives and strategies or if there are conflicting interests (ex. increasing sales versus reducing holding costs, a shift in product offering).
In Consignment, inventory is owned by the vendor (consignor) until it is issued or sold but kept on the buyer's (consignee) premises. Consigned inventory can be vendor-managed or buyer-managed. The primary benefit of consignment is the reduction of working capital for the buyer. The buyer reduces their financial risk by not taking ownership, and paying for the inventory until it is sold or used. At the same time, it also reduces the risk of obsolescence of inventory because unsold inventory is ultimately returned to the vendor.
Consignment may increase the administrative burden of the consignee because it has to track ownership and sales separately. It may also have to keep owned versus consigned inventory separately thus adding to the required storage space. The profit margin may also be lower for consigned inventory because the buyer is essentially earning a commission on sales (in the case of distribution or retail operations) while the vendor is likely taking a larger percentage of the profit to retain the financial burden.
Both of these methods require increased collaboration with the supplier. Additionally, these methods can be used independently or in conjunction with each other in varying degrees thus creating different distributions of risks and responsibilities. All of these possible arrangements require a higher level of trust from both parties and add complexity to the business relationship. However, if they are used under the right market conditions and executed well, there is potential for both parties to benefit more than with a traditional inventory management setup.
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