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Cost Reduction Strategy through Supplier-Managed Inventory

Supplier-Managed Inventory (SMI) is the process whereby a supplier plans, manages and replenish inventory for a customer. Extensive information sharing is required so that supplier can maintain a high degree of visibility of its goods at the customer’s location. Instead of the customer reordering when its supply has been exhausted, the supplier is responsible for replenishing and stocking for a customer at appropriate levels.

vendor managed inventory
Diagram taken from https://medium.com/@stitchdiary/vendor-managed-inventory-vmi-1dfba1f8e272

The goal of SMI relationship is to make sure the customer only buys what they will sell. Customer maintains closer contact with the supplier, aided by technology, so they can purchase stock in smaller batches but more frequently.SMI typically facilitated with communication technology such as EDI (Electronic data interchange), APIs (Application programming interfaces) and XML (Extensible Markup Language), which allows both supplier and customer to communicate directly and exchange information.

A successful SMI solution can be a win-win situation for both supplier and customer. The collaboration helps everyone involved benefits.

Reducing Inventory Investment

SMI can help to reduce costs associated with inventory management due to emergency or rush orders, understocked and overstocked inventories. In business, cash flow is closely tied-up with inventory levels, when cash is used to purchase inventory (that may never sell), that cash can’t be used to operate the business or invest in other growth opportunities. Every business wants to minimize their stock level to hold a little inventory as possible without running out, and it is usually a tough balancing act.


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Lai Sok Yen, DPSM
Lai Sok Yen has substantive experiences in distribution and retail industry, specifically in costing and pricing in the specialized tooling sector. She is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). Sok Yen completed the Diploma in Procurement and Supply Management (DPSM) course on December 2018 at SIPMM Institute.
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