July 1, 2020
A well-oiled supply chain makes an organization competitive, profitable, and trustworthy. Building an effective supply isn’t exactly a walk in the park. It requires the various disparate parts of the supply chain to work seamlessly in tandem. In practice, this is creating and maintaining stable systems and relationships.
Traditionally, the buyer of goods manages their own inventory, including placing orders and restocking. This approach doesn’t always work well:
As a buyer, you don’t have control over or insight into your supplier’s inventory, which can and does cause major hiccups to your work processes. As a vendor, you can’t always instantly meet your buyer’s demands. Any loss to their bottom-line also eventually affects yours.
A VMI is a natural extension of the relationship between a buyer and a seller. It shores up many of the weaknesses of your run-of-the-mill supply chain and makes it far more efficient. Walmart is a giant today thanks in no small part to its savvy use of the VMI system. A VMI mainly fosters a mutually-beneficial arrangement between the buyer and seller.
What does a vendor-managed inventory mean exactly? As the name implies, it’s allowing the vendor in the supply chain to almost fully manage and optimize the buyer’s inventory for them. The buyer assumes responsibility for supplying internal inventory-related data to the vendor, including communicating a rise or fall in demand. The vendor responds to the data and handles the inventory logistics – often including the transport – when the replenishment point is reached.
A VMI allows you – whether you’re the buyer or the seller – to build a more stable supply chain with fewer stockouts and higher inventory turn:
Contractors schedule based on promises made to them by vendors. If one vendor misses their deadline, the delay causes a domino effect within the scheduling process. Contractors receive bonuses for delivering early and penalties for being late. Often, contractors make very little to no profit on the actual job, but they make a substantial amount from their bonuses and such from being on time or early. A penalty is often steeper than the bonus so it can hurt the contractor’s bottom line pretty severely for being late. The vendor is likewise affected.
With a VMI, the vendor receives continuous data about the buyer’s current stock. The vendor can anticipate demand well in advance and get the necessary supply ready in time. Contractors are almost guaranteed timely delivery, allowing them to keep to schedule and sometimes finish early, leading to higher bonuses.
VMIs create a faster, stable, and more efficient flow of resources. The inventory risk gets distributed evenly between the vendor and the buyer, and free data sharing allows for better forecasting and a more profitable inventory turn.
Consistency creates trust, which then eventually translates to loyalty. Inconsistency, on the other hand, creates turbulence and lost business. As mentioned earlier, traditional supply chain structures, with the buyer controlling their stocks independently, aren’t always consistent. Demand can be unpredictable. Ordering too much supply causes waste through degradation while ordering too little leads to stockouts and missed schedules. VMIs are much more consistent, though.
You will build trust with your customer base if you are consistent, reliable, and transparent. You generate loyalty and more frequent, steady business, regardless of where you fall in the supply chain. When you’re a buyer, you score brownie points with your vendor by ordering from them consistently. As a seller, you deliver on time, every single time, and help your customers become more profitable.
Time, trust, and transparency are the three aspects of highly-effective supply chains, according to a paper published by the Cranfield School of Management. Companies that address all three aspects effectively are the only ones that can compete in the digital era. Integrating a VMI system into your supply chain goes a long way toward creating a well-balanced, effective supply chain. Think of it as an upgrade to your supply chain, making it more capable of handling external challenges.
VMI systems offer multiple benefits: consistent scheduling, shorter lead times, optimized equipment set-up, and better control over overheads. All these benefits lead to direct financial gains. The trust you generate bolsters your reputation. The reduced time equates to a more efficient process. The transparency creates a stable, reliable system. With all three Ts addressed, you can expect to capture more market share than before.
You’ll have to invest some resources to implement a VMI. We recommend starting with an initial assessment on how a VMI could assist you and calculating the potential ROI. How much would the lack of stockouts benefit you? What savings can you expect by reducing your inventory holdings by 30%?
Next, you must get in touch with your suppliers or buyers and make sure they’re amenable to it. The VMI would require your two organizations to work even more closely together than before. Do they have any pain points for you to address? They may need to conduct an assessment of their own before you can proceed.
Finally, there’s the technology aspect. VMIs are driven first and foremost by data exchange. You need a solution that allows you to share real-time, actionable data with the other party about your inventory. Stockpile Reports can help with that. We’re the only solution provider in the market that can help automate your supply chain through instant reports.
VMIs aren’t exactly a new concept. However, many organizations hesitate to try them out despite the many benefits. It’s hard to trust an entity outside your organization with managing whatever portion of your inventory, no matter how close your ties. Fortunately, technology has come a long way in recent years and offers a way out via transparency. Solutions like Stockpile Reports’ real-time inventory reports allow you to figure out exactly how much stock you have on hand at any given time. Simply put, you’ll be able to trust but verify. Get in touch with us to learn how we can assist you with your VMI implementation.
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