VMI conclusions for fashion brands and retailers - November 2023

November 10th, the fourth get together of fashion brands in 2023 about VMI as the alternative  business model, took place at WAIR's office in Amsterdam. VMI stands for Vendor Managed Inventory, being the business model with the brand in control of the merchandise in the overall value chain (from manufacturer to consumer).

Much has been said in previous blogs about the VMI committee and the VMI business model.

Let's be clear how to define the VMI business model: where the retailer has control over the combination of brands on its shop floors and the number of available square meters per brand per shop floor, the brand controls the seasonal replenishment of the goods, based on daily accurate stock and sales figures per SKU from the corresponding store floors. The retailer pays for the goods delivered to its distribution center or preferably directly to its sales floors. With the VMI model in place, the brand can take responsibility of the goods throughout the total value chain. 

In the run-up to the meeting on November 10, experts from the fashion industry have carefully calculated 8 financial models. Each one from the basics, i.e. turnover minus cost price = margin. And that for the brand and the retailer separately, but also for the sum of those two VMI partners (the value chain).

With two variants: an initial mark-up factor of 2.5 versus an initial mark-up of 2.0 (definition of the mark-up factor = consumer turnover including VAT divided by the retailer's cost price excluding VAT).

Both variants have been calculated in four scenarios, where scenario 1 concerns the traditional wholesale model and scenario 4 represents the VMI model (scenario 2 and scenario 3 are the two models in between).

Findings based on the extensive calculations of 8 variants:

• We should no longer think in percentages and surcharges, but in Euros earned (Euros earned provides a completely different picture and is much better for a clear assessment and good comparison).
• The VMI scenario (scenario 4) is only slightly less positive for the brands than the traditional wholesale model (scenario 1). However, there are more compelling advantages:
• Better customer loyalty / intensification of the relationship with retailers
• More control over the flows of goods
• True partnership with retail partners > bottom line more euros in margin
• Better able to take full chain responsibility (more sustainable through overall supply chain orchestration by the brand)
• Even with a markup of only 2.0, the VMI scenario for a retailer is better compared to scenarios 1, 2 and 3 with a markup of 2.5
• The VMI scenario offers room for a lower starting margin for the retailer, which means a better final margin in euros is achieved by both the brand and the retailer.

Conclusion 

The final conclusion is very clear: 

The VMI scenario is much better for strengthening the overall value chain!!!

The 4 scenarios, compared with a markup factor of 2.5

The 4 scenarios, compared with a markup factor of 2.0

The conditions for the modelling with the different markup factors

The characteristics of the 4 scenarios

The underlying spreadsheet data is available upon request.

Note that by injecting AI-based sales forecasts per SKU into the VMI model, the outcome of this model can actually be significantly better compared to the traditional wholesale model (https://wair.ai/the-ai-replenisher/).