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Is VMI for you?

Why it may make sense for industrial distributors to let key suppliers manage their inventory

by Max Buchanan

It seems counter-intuitive that you can improve inventory management and increase sales by allowing suppliers to maintain your inventory. But more  distributors are doing just that with key suppliers. In fact, many are encouraging key suppliers to help with Vendor-Managed Inventory (VMI) programs. Why? Because it may result in increased sales, improved inventory turns and reduced administrative costs.

“The benefits (of VMI) for Graybar start with a closer relationship with an important supplier,” says Mike Dumas, Graybar vice president. “The supplier now has a stake in the game for the accuracy of our inventory. We get better turns, lower total inventory investment and less  obsolescence and slow-moving product. This translates into better utilization of our cash and resources — in other words, profitability.”

A Proven and Growing Practice
VMI has been around since the 1980s when Procter & Gamble and Walmart invented the practice. VMI has  become a standard in many parts of the retail industry and is on the upswing in wholesale distribution industries such as electrical, plumbing, aftermarket truck and auto parts, and industrial products. For instance:

• In the consumer packaged goods industry, nearly all major suppliers and retail outlets participate in VMI programs

• In the electrical industry, 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 heavy-duty truck parts industry, at least 20 of the top suppliers have an active VMI program and more than 50% of the top 100 distributors do VMI with one or more suppliers

• A growing number of industrial distributors and suppliers are initiating and expanding VMI programs as it becomes a more common business practice  

Like many innovative business practices, VMI was adopted first by leading and forward-thinking companies in each industry. The use of VMI is expanding as distributors and suppliers want to realize the benefits 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 process is simple:

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

Why Key Suppliers May be Willing
“It is BDI’s practice to reward suppliers that have successfully implemented VMI with additional market share,” says Rick Copfer, vice president of sourcing for Bearing Distributors Inc. “This makes business sense as our VMI suppliers provide inventory reductions in the 10-25% range, improved fill rates of 3-5%, and reduced transactional costs of 6-7%.”

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

• The supplier knows that fewer stock-outs mean increased sales. With the right tools, it’s easier for them to effectively manage their SKUs 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, which helps them with production planning.

• The supplier knows that distributors 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 Distributors Like VMI
As a distributor, why would you want a supplier involved in managing your inventory? Here are three good reasons:

1) Improved inventory management. VMI suppliers can probably do a better job of managing their products for you than you can yourself – and have a big incentive to do it well.

• Fewer stock-outs = increased sales

• Better replenishment = faster turns   

2) Reduced administrative costs. Because your supplier does most of the work, your buyers spend less time managing those products. Buyers can manage at least two times as many SKUs on VMI compared to the traditional approach, and transactions are reduced by at least 10%. That means you can reallocate resources to troublesome products or to other value-added activities.

• Less allocated manpower = reduced cost

• Fewer transactions = reduced cost and lower

      potential for error    
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 better able to capitalize on opportunities and manage market swings.

• Better collaboration = reliable supply

“VMI further strengthens relationships between us and our distributors by enabling us to work more collaboratively,” says Jim Hill, general manager Industrial Products, Veyance Technologies Inc., exclusive manufacturer of Goodyear Engineered Products. “VMI helps our distributors grow sales, reduce inventory, improve fill rates and better align their inventory strategy with the needs of their end-customers. As they start to realize these benefits, VMI helps us both drive increased sales for mutual benefit.”

How to Decide If 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:

1) To learn more about Vendor Managed Inventory, visit www.datalliance.com. You can find a wide range of articles, success stories and other resources to explain how VMI works, answers to common concerns and keys to success.

2) 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 six to eight.

3) 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?

4) 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.

5) Expand to additional suppliers at a pace that makes sense to you.
Max Buchanan is the director of the industrial, auto and heavy-duty markets for Datalliance. Datalliance is a VMI service provider, processing nearly $5 billion in orders and managing over 13 million SKUs at more than 28,000 customer locations. For more information about Datalliance and VMI, visit www.datalliance.com.

A New Generation of VMI
A new generation of technology is making it much easier and much more cost-effective for suppliers and distributors to create collaborative VMI relationships. Examples of industrial suppliers launching or expanding their VMI programs using Datalliance include:

• Gates Corporation - a manufacturer of industrial and automotive products, systems and components
• NSK – Manufacturer of precision ball screws, linear guides and actuators.
• Rexnord - a diversified manufacturer and marketer of power transmission and water management products.
• Timken - a producer of highly engineered antifriction bearings and related products and services and alloy steel and components.
• Veyance Technologies Inc. – exclusive manufacturer of Goodyear Engineered Products – Global supplier of industrial and hydraulic hose and fittings, automotive and commercial truck, conveyor belt, power transmission, home and garden, rubber track and original equipment parts.
• WIKA Instrument Corporation - a supplier of industrial pressure and temperature instrumentation.

Max Buchanan is the director of the industrial, auto and heavy-duty markets for Datalliance. Datalliance is a VMI service provider, processing nearly $5 billion in orders and managing over 13 million SKUs at more than 28,000 customer locations. For more information about Datalliance and VMI, visit www.datalliance.com.

This article originally appeared in the May/June 2010 issue of Industrial Supply magazine. Copyright 2010, Direct Business Media.

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