By D. Douglas Graham
In vendor managed inventory (VMI), a supplier maintains and manages the merchandise it sells to a wholesaler. Distributors unfamiliar with this concept may have reason to wonder “What’s in it for me?” Plenty, replies Tom Hoar, director of sales for Datalliance (datalliance.com), a Cincinnati-headquartered VMI service provider. “More and more distributors are building VMI relationships with their suppliers for the simple reason that it works,” he explained. “In fact, many wholesalers actively encourage their suppliers to include them in their VMI programs because doing so increases sales, improves inventory turns, and reduces administrative costs.”
The Supply Chain Optimized.
VMI began when Proctor & Gamble and Walmart launched the concept in the 1980s. It has since become standard in retail and has penetrated many segments of industrial wholesale distribution, including electrical. Currently, 80% of leading electrical suppliers have an active VMI program, while more than 66% of the top 100 electrical distributors practice VMI with one supplier or more.
The minutia of VMI agreements are planned well in advance to ensure that all processes transpire with maximum efficiency. Goals and metrics are set by both parties, focused mainly on in-stock performance, inventory turns, and transactional costs. Some VMI agreements also address other inventory management issues such as how to handle excess inventory returns.
While technology plays a crucial role in VMI, it is not a process solely vested in technology. VMI is actually less about mechanization than it is methodology. Practiced best, it’s a gentleman’s agreement arrived at via a great deal of blueprinting, negotiating, and compromising.
“Forget technology. Think strategy,” counseled Ranga Bodla, director of industry marketing, NetSuite Inc. (www.netsuite.com), a provider of cloud-based, financial ERP and omni-channel commerce software in San Mateo, Calif. “Concentrate on what you hope to achieve for your business, and all the people with a stake in its success. VMI should be seen as a tool, but never an end in itself. Its purpose is to enrich the relationships you enjoy with everyone in your supply chain with the ultimate aim of improving customer satisfaction though collaboration. It’s a collaborative effort, bottom line, and it’s from collaboration that meaningful partnerships are built.”
VMI At Work
A VMI supplier’s job description includes monitoring sales and inventory levels, managing reordering calculations based on lead time and other factors, and recommending and placing replenishment orders according to a planner review. In other words, the supplier works harder and assumes more responsibility than the distributor.
Why?
“The supplier knows fewer stock-outs mean increased sales,” explained Hoar. “With the right tools it’s easier to effectively manage the SKUs it provides distributors than it is for purchasing agents at distributorships to do the same since since they’re responsible for thousands of SKUs across dozens of suppliers. A supplier also possesses more information on the stock it sells than its distributor/partner. It will be aware, for example, of lead time changes, and will make certain such changes are reflected in its reordering calculation so supply disruptions are avoided.”
A VMI supplier also has the advantage of greater actual demand visibility, and can use that to leverage its own production planning. Supplier sales too in VMI relationships as well, since distributors work more closely with them on promotions, new product introductions, and in other areas where in which the objectives and communication channels of both parties well-align.
Why Not VMI?
Vendor managed inventory is a concept with few downsides, says Dominic Telaro, director of inventory solutions, I.B.I.S. Inc. (www.ibisinc.com), an independent software vendor with global customers based in Peachtree Corners, Ga. “It offers big advantages,” he said. “Products are available when required, and with the VMI model the cost of inventory maintenance, and inventory cost itself is much-diminished.”
Distributors stand to score in VMI in three key areas: First, inventory management improves because suppliers have a big stake in the process. Second, administrative costs go down as well, since purchasing and inventory management processes are simplified or eliminated entirely. And third, VMI promotes strong supplier/distributor partnerships as partners must cooperate to make it happen.
Getting on board with VMI will call for research. The Internet is replete with VMI articles and success stories, but don’t stop there. It’s also a good idea to consult with distributors currently involved in VMI partnerships. Once sold on VMI, identify the suppliers most important to your business. Target 10 candidates, and of that group make overtures to six or eight. Ask these suppliers the hard questions. What steps do they take to guarantee good service? How do they handle overstocks? Launch a pilot program with a single supplier, and if that relationship works out, initiate a couple more. VMI is a work in progress in which trial and error play a developmental role. Like any process, it works best when well-learned and played well by all the players in the game.
D. Douglas Graham is a St. Louis-based freelance writer. Reach him at 314-394-0371.
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