When it comes to small, standard parts, the VMI or Vendor Managed Inventory can be one of the best supply solutions for both customers and vendors. Whether MRO items or “C” Level production parts, the VMI offers lower price, lower time investments, more cash, higher ROA, and better supplier relationships.
A VMI is simply having the vendor take control of supply by pushing product. This is opposed to a standard purchase order where the customer is pulling resources in. An implementation of this method, often called a program, works especially well where the items in question are:
- able to be easily stored
- used consistently
- are a hassle to refill / reorder
- are not essential to the products function
What Makes It Different?
By looking more closely we can understand the sources of the many benefits of VMI programs.
In the normal course of business, a customer dictates what they want and when. You wouldn’t let Best Buy choose what to ship you and when would you? No, you decide first that you need a product based on assessing your current needs and wants, and then proceed to purchase. This is generally referred to as pull system.
Regardless of how surprising it may be, there are circumstances under which you would want to give a company the ability to decide what to ship and when. It is under these circumstances that a VMI program can be a key component in both your demand planning and supply chain.
Grocery Store As A VMI
When you go to the grocery store, it would be quite an inconvenience to let them know 1–4 weeks ahead of time what you were going to buy, and then show up to get them. Beyond that, when you arrived, just what you ordered was on the shelves. No, instead you prefer that you go grab what ever you would like, whenever. You expect the store to constantly restock to full when you take items. This is similar to a VMI system.
Cereal is easy to store, and inexpensive. There is constant use and thus makes sense to to keep the shelves stocked so the customer’s can take as much as they like, whenever they like. The customer’s don’t need to pay until they actually pull the items from the shelves, and they don’t need to call in orders, or wait for lead times for the grocery store to order the product from the suppliers and get it shipped.
When A VMI Makes Sense
When items are
- standardized - via an industry standard or similar understanding
- used in consistent fashion
- able to be easily stored it may make sense to put these items into a VMI program with the supplier.
An Example Situation
Imagine you work for an appliance assembly plant, and you head up all the buying. It is your job to make sure
- You have good suppliers
- They send good product
- The production doesn’t run out of any parts that you are responsible for.
You are in charge of fasteners such as bolts, washers, nuts, and similar items.
Here are some stats from one of our current customer’s facilities. They:
- make 4 different appliances
- each appliance has between 2 and 6 variations (we’ll assume an average of 3)
- Each appliance variation uses 25 different fasteners, with a total quantity of 120 per appliance (There is roughly 20% overlap in usage from variation to variation).
- The build goal is an average of 200 of each (actual average build goals range from 100 to 1000 per day).
This give us
4 x 3 = 12 different units produced 12 x 200 = 2400 units produced per day 2400 x 120 = 288,000 fasteners used each day 12 x 25 x (1- 20%) = 240 different fasteners being managed.
How would you go about managing all 240 fasteners in order to meet your stated goals above - namely, don’t shut the line down? They are most likely from multiple vendors creating a high administrative burden for you. Each day you must make sure that production is running. This means you are consistently
- checking current stock levels for each part
- monitoring build rates for each motor
- writing purchase orders for various parts to the various suppliers
- monitoring delivery times and lead times
- overseeing supplier communication
- monitoring any quality issues that may affect part availability in the warehouse
Beyond this, you need roughly 8.6 million parts on the shelves each month. This represents a sizable investment for your company and may cause issues in budgeting, cash management, and spend analysis.
Considering the price of fasteners is quite low, the parts are standardized, and their storage is rather easy to facilitate; A VMI program might make sense here.