Reasons to let a supplier manage your inventory

BY TOM HOAR
Special to The Wholesaler

As a wholesaler considering participating in a supplier’s Vendor Managed Inventory program, you might be asking yourself, “Why would I let a supplier manage my inventory?” It may seem counter-intuitive that you can improve inventory management and increase sales by allowing suppliers to maintain your inventory. But more and more wholesalers are doing just that with key suppliers. In fact, many wholesalers are now encouraging suppliers to include them in their VMI programs. Why? Because for you, the wholesaler, it results in increased sales, improved inventory turns, and reduced administrative costs.

A proven and growing business practice

VMI is not a new concept – it’s been around since the 1980s when Proctor & Gamble and Wal-Mart started the practice. VMI has become a standard in the retail industry and is very much on the upswing in wholesale distribution industries such as electrical, plumbing, and industrial products. For instance:

• In the consumer packaged goods industry where VMI started, nearly all major suppliers and retail outlets participate in VMI programs.
• In the electrical industry where VMI has become well-established, 80% of the top 50 suppliers have an active VMI program and 66% of the top 100 distributors do VMI with one or more suppliers.
• In the plumbing industry, where VMI is now becoming a common business practice, at least 25 of the top suppliers already have an active VMI program and a growing number of wholesalers do VMI with one or more suppliers.

Like many innovative business practices, VMI was adopted first by the leading and forward-thinking companies in each industry. The use of VMI is now expanding as both wholesalers and suppliers are seeing the benefits and want to realize them for more of their products and sales channels.

A straightforward process

With VMI, a supplier takes responsibility for managing your inventory of their products. Both parties agree up front on the goals and metrics – usually focused on in-stock performance, inventory turns, and transaction costs. Other agreements may be made regarding returns of excess inventory, etc.

The basic VMI process is relatively simple:

• The supplier monitors your sales and inventory levels for their products.
• The supplier manages reordering calculations based on actual demand, lead time and other factors.
• The VMI system recommends replenishment orders. The supplier’s VMI planner reviews and places the orders; planner and buyer communicate in exception situations.

Why your key suppliers may be willing to take responsibility and do the work

There are several reasons why suppliers are willing to take on this activity:

• The supplier knows that fewer stock-outs mean increased sales. They have learned that, with the right tools, it’s easier for them to effectively manage the SKUs you carry from them than it is for your buyers who are responsible for thousands of SKUs across dozens of suppliers. The supplier also has more information – for instance, they know when their lead times change and can make sure they are properly reflected in the reordering calculations to avoid any supply disruptions.
• With VMI, the supplier has greater visibility of actual demand, information which helps them with their own production planning.
• The supplier knows that wholesalers with whom they do VMI tend to work more closely with them on promotions, new product introductions, and other ways to increase sales, because their business objectives and communication channels are well aligned.

Why you, as a wholesaler, will like VMI

Back to the original question: As a wholesaler, why would you want a supplier involved in managing your inventory? Why would you want to allow a supplier to maintain something as important to your business as having the right inventory on hand? Here are three good reasons:

1. Improved inventory management.
Because of the reasons stated above, VMI suppliers can probably do an even better job of managing their products for you than you can yourself – and they have a big incentive to do it well.

• Fewer stock-outs = increased sales
• Better replenishment = faster turns

2. Reduced administrative costs.
Because your supplier is doing most of the work, your buyers spend much less time managing those products. Experience has shown that buyers can manage at least twice as many SKUs on VMI as they can manage using the traditional approach. That means you can re-allocate resources to troublesome products or to other more value-added activities.

• Less allocated manpower = reduced cost

3. Stronger supplier relationships.
Because you and your supplier focus on the same metrics (e.g. fill rates and inventory turns) to measure the program’s success, you know your goals are always in sync, and performance is always visible. You and your supplier become stronger partners and are both better able to capitalize on opportunities and manage market swings.

• Better collaboration = reliable supply

Deciding if/when VMI is right for you

If you have not already done a conscious evaluation of what VMI could do for you, here are a few easy steps:

• To learn more about Vendor Managed Inventory, visit www.vendormanagedinventory.com. You can also find a wide range of articles, success stories, and other resources to explain how VMI works, answers to common concerns, and keys to success at www.datalliance.com.
• Identify the suppliers that are most important to your business and for whom you are an important channel. Target your top 10%; start with your top 6-8.
• Talk with those suppliers. Do they have a VMI program? If so, are they interested in doing VMI with you? How does their program work? What would be required of you? How would they ensure high service levels? How would they handle overstock situations? How would you maintain visibility and effective communication?
• Select an initial supplier with whom you have mutual trust. Confirm that your interests and theirs are well aligned. Start with a pilot – possibly at just one location – to prove the process. Once that location is working well, you can fully implement with that supplier with confidence.
• Expand to additional suppliers at a pace that makes sense to you.

Datalliance is one of the world’s largest independent VMI service providers, processing almost $5 billion in orders, over 11 million SKUs managed, and more than 26,000 customer locations. Delivered as a managed service via the internet using the ‘Software as a Service’ (SaaS) model, Datalliance VMI makes it easy for suppliers and their customers to establish effective VMI relationships that fully align business objectives, improve collaboration, and streamline supply chain operations. Datalliance serves leading Fortune 1000 companies and their distributors, retailers and customers in a number of different industries. For more information about Datalliance and VMI, visit www.datalliance.com.

Tom Hoar is director of sales-plumbing for Datalliance. He can be reached at thoar@datalliance.com.