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:
1. 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.
2. 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.
3. 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.