Vendor managed inventory is a fairly simple concept that involves placing inventory of raw materials and finished goods at your customer’s location and then managing the inventory counts accordingly. However, while it may sound straightforward, it’s the execution itself that sometimes confuses vendors. So, to help, here are five VMI strategies you can use when looking to manage stocking levels at your customer’s warehouse.
1. Vendor Onsite
In this situation, one of your employees is onsite at your customer’s facility managing your company’s physical inventory counts. This is ultimately a nine to five job, one where your employee is paid entirely by your company and is ultimately responsible for managing all aspects of your customer’s minimum and maximum counts.
In a number of cases, your employee will represent your company within the customer’s inventory planning meetings. It’s their job to schedule incoming shipments, reduce damage and pilferage, and ensure that your customer never encounters a stock out. For the most part, these types of agreements are for large volume contracts, one where you company provides the majority of your customer’s inventory requirements.
2. Replenishment Upon Visit
This is likely the most popular type of VMI agreement and one most of us are familiar with. In this case, your employee brings the inventory with him or her and physically restocks the customer’s shelves. You’ve likely seen this when going to your local corner store, grocery store or convenience store when you’ve seen a company representative restocking shelves with chips, drinks etc.
Replenishment upon visit typically involves managing multiple VMI agreements with multiple customers. Your company has a number of customers on a route and arrives once a week or month to replenish their stock. Sometimes this requires your customer providing you with an estimate of usage during that month so that you have an idea of how much to bring and when.
3. Vendor Has Access to Customer Inventory System
Another type of VMI agreement includes managing your customer’s inventory from your own location. This often involves having access to their inventory counts through their MRP or ERP system. You’ll define the quantity that must be maintained at all times and the maximum amount of inventory to be replenished. However, it’s important to note that your customer will likely limit your access to only your inventory of finished goods, as you would easily be able to decipher your competitor’s pricing and offers if you had complete access to your customer’s software.
4. Barcode, Pictures and or Excel Sheets
This type of arrangement is a collaborative effort between you and your customer, one where you’ll need a certain amount of trust that your customer will provide accurate counts on inventory. Ultimately, it’s less of a vendor managed inventory agreement and more of a consignment inventory agreement, one where you customer provides you with a tally of inventory usage in a given week or month. Once that amount is provided, your company invoices your customer based on that usage and replenishes their inventory accordingly. Your customer can use a simple RFID scanner to capture barcodes. Or, they could provide you with pictures of inventory counts, coupled with a running tab on an excel sheet.
5. Vendor Leases Warehouse Space
Finally, your company could lease physical warehouse space within your customer’s facility or adjacent to their facility. The main difference between this fifth option and the first option comes down to the type of VMI agreement you negotiate, in addition to the type and size of inventory you’re providing.
However, if you lease space adjacent to the warehouse, or lease a warehouse of your own in close proximity to your customer’s location, then you would likely use that warehouse to service other local customers.
Pros and Cons of VMI
There are benefits and drawbacks to these agreements. First, a VMI agreement allows you to secure a position as the incumbent supplier. You’ll no longer have to concern yourself with losing sales to competition. You have your customer’s business and they are only purchasing from your company.
Second, it’s an ideal solution for those customers who lack the ability to plan purchases. You’re providing a service in this case and helping them better manage their inventory. Finally, you’re able to reduce your per-unit freight costs on incoming parts by making sure you use your economies of scale on incoming shipments. This is an added benefit as some customers fail to order the right quantities at the right time.
However, there are some drawbacks to running VMI agreements. First, your company still has to concern itself with carrying costs of inventory. This includes financing, obsolescence, damage, pilferage, counting, freight etc. The inventory is yours until your customer uses it and as such, your costs would be the same as if that inventory were still at your warehouse.
Second, a VMI agreement can be expensive to manage, especially if you have to pay an employee to manage those physical counts at your customer’s location. These costs include much more than just covering a salary. For instance, you’ll have to cover insurance for your employee, but will you cover transportation, overtime and accommodations as well? Finally, there is always the risk that the customer will simply decide to end the agreement. If this were to happen, how would you handle returning that material to your location?
For additional sources on contractual supply agreements, please refer to the following posts.
Sample Blanket Order Agreement for B2B Sales: Identifying Liabilities
Supply Chain Management: Using Blanket Orders, Kan-Ban Agreements to Lower Inventory Costs
Sales Negotiation Training: Successfully Negotiating a Blanket Order
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