Don’t get bog down by these words.. like VMI…
As discussed in my earlier blog let’s refresh our understanding on inventory. All the material which is not getting processed on the machine ie not directly in production cycle is all inventory only. This then covers material in Raw material stores, material under inspection, material in pipeline at vendors place, material in transit and material waiting behind the machine for processing. Also this includes all material which is in FG form and is being sent to end customer. Only the form of inventory will keep on changing and also the accounting entries will change but all remains inventory only.
All the inventory is nothing but the money blocked in the business cycle. So lesser the inventory it is better.
Vendor Managed Inventory (VMI) is nothing but inventory physically secured for the customer by the vendor and is in books of accounts of vendor.
So VMI has following peculiar characteristics.
- Vendor manages inventory as defined by the customer.
- Mostly VMI inventory is kept at vendors place if he is in vicinity. If the vendor is away from customer’s place, then he transfers this inventory physically to customer.
- In this case when the VMI inventory is at customers place following points needs to be taken care.
- This inventory must be kept at separate location as per tax rules.
- Inventory will be in the books of accounts of vendor.
- This inventory will be taken into customer’s accounts as and when GRN is made and customer starts using this inventory.
- Reconciliation of inventory must be done by both parties periodically.
VMI is a very good concept and makes a business sense for both vendor and customer.