Vendor-Managed Inventory: Size Matters

While there is no such thing as a toilet paper fairy, there are inventory fairies. Better referred to as vendor-managed inventory (VMI) technicians, these folks assume responsibility for inventory planning and replenishing stock when it is low.

For many, Wal-Mart has set the standard for a well-oiled VMI machine. Widget makers and potion peddlers are responsible for getting their products to the store, stocking the shelves and making sure there is no shortage or overstock of any items.

For the distributor, it means less work and less risk. For the supplier, it means inventory is set up how and where you want it, and you have the opportunity to educate associates and employees about your wares. It also means more risk.

While the VMI plan works well for the manufacturer/distributor relationship, what about the manufacturer/ manufacturer relationship?

According to IndustryWeek‘s Best Plants 2006 Statistical Profile, 56% of the top 25 plants between 2002 and 2006 have used “resident suppliers” to manage or replenish inventory. However, the average percentage of purchased materials and components (dollar volume) managed by on-site suppliers is only 13.7%.

So, it seems, there is a time and place for vendor-managed inventory.

For example, if you’ve got an expensive manufacturing line and you ask one of your key suppliers to put in the systems and develop the expertise to supply the goods you need on a just-in-time basis, they will do that if they receive a significant portion of their revenues from you, says Steve Banker, service director of supply chain management at ARC Advisory Group, Dedham, Mass.

“However, you may have a lot of suppliers where you are only 1% of their total revenue — you are not their biggest priority,” Banker says. “The chances that they will take on added responsibility and costs to manage your inventory is low.”

In addition, there is a certain amount of IT integration that has to go on in order to make the VMI relationship work.

“For suppliers, they need to be able to get your forecasts on a regular basis, make intelligence out of them and have visibility into your inventory levels on an ongoing basis,” says Banker. “Turning that into useable intelligence is kind of difficult. Small and midsized companies often don’t have the dedicated IT resources to make that happen, so they struggle.”

For manufacturers that do partake in vendor-managed inventory, “the most advanced forms involve having a warehouse for your key supplier close to your factory,” says Banker. “Often what happens is there is a line in the factory and the goods come into the factory and they are still owned by the vendor until they cross over that line. VMI can drive more business, but sometimes it is implemented in a way where it affects cash flow. The supplier to the manufacturer ends up owning inventory for longer periods of time and ends up carrying more inventory risk. That often is a tradeoff for gaining more business.”

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