Operations Payoff

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Vendor Managed Inventory – A Too Frequently Overlooked Tool

I have talked to many purchasing personnel who will not use Vendor Managed Inventory (VMI) as a tool for inventory management in their companies. They have typically had a bad experience with suppliers overfilling bins, allowing stock outs, or they simply don’t trust suppliers to do the right thing related to stocking programs.

VMI is the process of having suppliers come in to the company to review current stock levels and order inventory as needed, and can include the supplier actually replenishing the stocking location with needed materials. It is often referred to as a “bread man” system since it was originally patterned after how bread is stocked in grocery stores.

Many vendor stocking programs focus on “C” items (those with low volume or value), such as fasteners, packing materials, or production supplies. While those materials are great targets for VMI, this overlooks other materials that suppliers can successfully manage. Basically, anything that can easily be visually managed, has short replenishment lead times (typically a couple of days to a week) and has a local supplier presence can be managed through VMI.

The biggest issue that stands in the way is trust. In a successful VMI program, an internal resource works with suppliers to:

1) Clearly define how the program will work and what the performance expectations are,

2) Monitor performance to assure the expectations are met, and

3) Meet with suppliers frequently to adjust inventory levels to meet the company’s future needs.

In other words, communication and trust are cornerstones of success with VMI; in fact, they are the cornerstones of any supplier relationship. How can you work with suppliers you don’t trust? Why would you?

The benefits of VMI are several –

1)    Reduced inventory levels

2)    Reduced stock outs

3)    Reduced internal cost of ordering and managing inventory

A final benefit is having the supplier actually see what is going on in your operation so they can make additional suggestions to improve service and cut costs, which is a true win/win for both organizations.

Don’t overlook this opportunity to significantly improve materials management in your organization. With solid processes and attention, VMI can be a home run for your company.

© 2011 – Rick Pay – All Rights reserved


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