October 23, 2019
A large aerospace OEM was experiencing serious problems managing their inventory.
On-time delivery from suppliers was at a less-than-ideal 70%. On-hand inventory burden was valued at $34 million. Multiple shortages and line stops were plaguing production, and a staff of 65 workers was required to manage the program.
This was not efficient resource allocation.
The OEM knew something had to change. They contacted a Vendor Managed Inventory (VMI) provider to see what could be improved.
The provider implemented a barcode scanning system for on-site bin management along with data analysis software. After implementation, the customer saw on-time delivery from vendors increase to 95%, on-hand inventory reduced by $15 million, and required management staff drop by over 50%.
As for the shortages and line stops, there were none.
The VMI provider transformed this inventory nightmare into a fluid and efficient system. And a Vendor Managed Inventory program could be a life saver for your business as well.
(If you were wondering, the provider was Wesco Aircraft. You can see the case study here.)
This is not to say that VMI programs are only for companies facing critical issues in their operations. In fact, these services are beneficial to any company looking for relief from the burdens of inventory management.
An expertly implemented inventory management system can bring tremendous cost and time savings to buyers, allowing them to better focus on what generates value for their company and their customers.
Vendor Managed Inventory is exactly what it sounds like. Instead of a company managing their own inventory levels and sending purchase orders to a supplier, the supplier keeps track of their customer’s stock and automatically initiates replenishment as needed.
No purchase orders necessary. Buyers can breathe a sigh of relief.
In some VMI programs, vendors physically come to the customer site and restock inventory themselves. Other programs use customer site data to determine delivery schedules without handling the physical stocking.
Regardless of its details, a well-run VMI program provides customers with an array of benefits.
Effective VMI services provide companies with advantages like:
The goal of VMI is to sustain ideal inventory levels at the customer site (like just-in-time). When successful, the customer has optimized inventory levels for their production schedules.
This alleviates the need for warehousing and its inherent footprint and labor costs. Space no longer used for inventory storage can be dedicated to more productive activities.
Furthermore, cash is freed from being tied up in inventory. Improved cash flow can be directed to profit-generating investments.
Since the vendor automatically replenishes stock levels based on actual usage data, VMI contracts eliminate the need for purchase orders (POs). Without PO related costs and routine processes, buyers are freed to deliver higher value workflow.
A reliable supplier will successfully maintain their customers’ necessary stock levels, allowing that customer to stick to production schedules without a hitch. Inventory is used before becoming damaged or obsolete in a warehouse, and the continuous flow of product as needed prevents shortages and line stops.
Overall, a successful VMI program will help to lean-out a customer’s operations. It trims the excess from your business and allows you to run at optimal efficiency.
This is the “why” of Vendor Managed Inventory. The next step is understanding “how.”
Clear and transparent communication between buyer and supplier is the first step to a mutually beneficial Vendor Managed Inventory program.
This requires that the customer provide the supplier with information about production schedules and inventory data. Timely and accurate data is critical for VMI to be successful. It allows the supplier to create robust forecasts of their customer’s inventory needs and provide a smooth flow of products at the right quantities.
Accurate, past usage data as well as forecasting future production rates is key to capturing maximum value of the program.
data-sf-ec-immutable="">This means establishing beforehand the expectations on each side, what information and data will be shared, and committing to open communication throughout the entire relationship.
Businesses should only enter VMI contracts with trustworthy suppliers. Finding vendors with a proven track record makes it easier to establish trust in each other’s capabilities. Look for success stories in your industry and find out what suppliers were behind them.
Certain parameters further help identify good suppliers to partner with.
For example, you absolutely need a supplier with a proven and certified quality management system. The chances for problems in your upstream supply chain are greatly reduced by professional quality assurance.
It is also important to find a partner that can serve your company scale. Locally, having a supplier that is relatively close to your locations will reduce freight costs and delivery issues. If you operate globally, find a supplier with multi-national locations and capabilities.