How Your Small Business Can Benefit From Vendor Managed Inventory

by Robert Moskowitz on June 4, 2013
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For most small manufacturing businesses, the necessary inventory of raw materials, product parts and sub-assemblies, and consumable supplies tends to be tedious and expensive to manage and maintain. Waste and loss are quite commonplace.

That’s why many management consultants and supply-chain experts now encourage companies to replace traditional supply-chain management strategies with the more effective methods of Vendor Managed Inventory. VMI can benefit both customers who let their suppliers make use of it and suppliers who learn to do it for their customers.

To explore the potential of VMI in your company, consider:

Developing Closer Partnerships With Your Suppliers

Traditional supply-chain management focuses on one’s own company. It looks for ways to save internally on purchases, warehousing, transportation, scrap, and rejected raw materials and parts.

VMI takes a broader perspective, recognizing that your inventory system extends all the way into your suppliers’ operations [PDF]. By working more closely with suppliers and shifting more responsibility for inventory management to them, companies can generally reduce the size of their inventories and shorten the delays between receiving an item and using it. The result is greatly reduced inventory costs.

By helping your customers pay less for what they buy from you, you can pump up their profitability, which will likely earn you a larger market share.

Developing Closer Partnerships With Your Customers

VMI also benefits suppliers. By integrating your operations more deeply into those of your customers, you create opportunities to develop ways to regularize and speed the flow of your products into your customers’ shops.

This brings a boatload of advantages:

  • It locks customers into continued (possibly larger volume) purchases from you.
  • It lowers your cost of sales.
  • It helps you to plan and adjust your company’s output to suit demand.
  • It helps you project production requirements, thus giving you more control over your costs.

That’s a formula for increased profitability.

Taking Responsibility for Stocking Customers’ Inventories

When suppliers and their customers operate in isolation, inventory issues present plenty of opportunities for errors, inefficiencies, and waste, such as:

  • requirements to purchase in sub-optimal quantities;
  • purchase limitations that fail to qualify for larger-volume discounts; and
  • responsibilities to monitor and manage inventory, deal with sales people, initiate purchase orders, handle inbound shipments, and physically replenish stock.

All of this goes away when the supplier takes responsibility for a customer’s inventory. Suddenly, the customer has less to do and can rely on always having adequate inventory on hand.

Customers enjoy VMI because it unburdens them from inventory hassles and allows them to concentrate on their primary business opportunities.

Optimizing the Inventory Mix

Depending on your industry, you may need to maintain many different items in inventory, actively count each one, and anticipate how early to order more to be sure you don’t run out.

When suppliers and customers establish VMI, however, the whole effort becomes simpler. As long as the customer informs the supplier of anticipated production quantities, the supplier can easily adjust deliveries to keep inventory levels up to agreed-upon minimums.

Investigating and Solving Customers’ Inventory Issues

Under traditional supply-chain management, your customers’ problems were theirs alone. With VMI, however, you will help your customers solve any inventory problems that may arise, and your suppliers will be working to help you solve yours.

This is a win-win scenario, because your special expertise in your products and production methods can yield faster, better solutions to your customers’ inventory problems, binding them to you more tightly than ever. At the same time, you are no longer alone in facing your inventory management concerns; your suppliers are working shoulder-to-shoulder to solve your obvious problems and to seize opportunities that you may not recognize.

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