Writing in Manufacturing Engineering magazine a few years ago,
manufacturer Matthew Malkie referred to Apple CEO Tim Cook and Cook’s
contention that inventory was “fundamentally evil.”
What Cook meant was that inventory depreciates very quickly when it’s not
moving. He compared it to the way milk goes bad after a few days.
“When a manufacturer has excess inventory not adding value to the process,
the inventory is hurting the company’s balance sheet, and is by definition
wasteful,” Malkie wrote. “Having excess physical inventory on hand
increases the need for expensive warehousing space, not to mention the
risk of obsolescence. All of these carrying costs put the enterprise at a
financial risk.”
So to avoid that risk, a number of manufacturers, distributors and
retailers have begun to use what’s known as vendor managed inventory or
VMI, in which the customer provides information to a vendor, and the
vendor then takes charge of maintaining a set inventory of their product
at the buyer’s location.
This system allows companies to reduce the size of their inventory and
shrink the delays between when they get an item and when they can sell it
or use it, leading to a reduction in inventory costs.
VMI lets suppliers integrate their operations with customers, allowing
them to find ways to streamline the flow of products. As long as the
supplier sticks to its task of preserving inventory and evading stockouts,
it will be able to lock in the customer for the long term, leading to a
steady flow of income.
The Supply Chain Resource Cooperative at North Carolina State University’s
Poole College of Management lists three ways to make VMI work:
- Spell Out Your Expectations
Both the supplier and the customer need to discuss how the system will
benefit them both in the long term. Without that discussion, there’s bound
to be some disappointment in the short term. Your objective should be
clear, constant communications between customer and supplier. By working
together, both sides can be assured that VMI will function without hiccups
over time. - Agree On The Best Way To Share Information
If the supplier and customer agree on the best way to share information
crucial to restocking on time, then you improve your odds of synchronizing
your system. This doesn’t mean you need to share proprietary information,
but you do need to provide enough info to keep a steady flow of goods. The
customer should be willing to offer production schedules or forecasts to
provide visibility to the vendor. - Keep The Lines Of Communication Open
When a vendor and customer decide to set up VMI, they need to meet and
discuss their goals and the best way to achieve them. Both sides should
accept that there will be some miscues. Think of them as opportunities to
learn and avoid repeating these mistakes.
And those mistakes can happen, just as mistakes can and will happen in any
system. The supplier may not be able to schedule a shipment on time,
causing a drop in inventory. Or a customer’s new promotion might cause a
spike in demand that puts a burden on the supplier, leading them to change
its production priorities.
In most cases, VMI failure happens when communication breaks down. These
problems can be mitigated by addressing them early and often.
If you think vendor managed inventory will work for your company, contact
Mars International. Through methods such as pre-purchasing and drop
shipping, we make it easier for you to get a handle on your products. Even
if you don’t think of inventory as “evil,” we’ll make sure yours is a
force for good.
