The following question was asked by a supplier of MRO and spare parts (as you will see), however, I though that the response might be instructive for everyone that manages inventory so have included it here.
Q: I work for an MRO distribution company and would like to inquire about getting materials or information on determining the best fit for a Vendor Managed Inventory customer as well as implementing Vendor Managed Inventory (VMI).
A: It’s an interesting question because usually I am asked from the customer side not the supplier side!
Also, I am usually most concerned with consignment stock rather than VMI, as consignment removes the inventory from the customer’s balance sheet.
With respect to consignment, if you have a copy of my book Smart Inventory Solutions (2nd edition) pages 121- 126 deal specifically with consignment (and a little bit about VMI) and there is a check list for implementation (but written from the customer side).
With respect to either consignment or implementing Vendor Managed Inventory (VMI), because you are managing the stock remotely, one key is that you need to have visibility of what’s on hand and what is used. There are many ways that this can be achieved, from the old fashioned approach of a sales person checking, through to integration with the customer’s IT system. A few years ago I saw a case study on a place that used a webcam so that they could check stock levels via the net. In any case, you need to target customers that will facilitate the information transfer, no matter which technique you use.
From a supplier perspective you want to target items that turn over so I think that you would target companies with some minimum level of usage that you think is economic for the time and effort involved in implementing VMI. You would also target the entire stock of the items you sell but may want to exclude some very slow moving insurance spares.
I think that a good consignment/VMI deal occurs where the relationship changes the dynamic of stocking practice. This means generating efficiencies in:
- The supply chain – because the supplier can plan their activity
- Manufacturing/supply – because the supplier is not responding to erratic orders
- Transport – through improved scheduling
- Order management – because the supplier is not processing a stream of orders but settling (say) monthly
- Inventory holdings – because the supplier (or customer) can reduce safety stock if they are confident of the supply capability (customers often hold stock because they don’t trust the suppliers)
You also need to address the risk management issues – customers are concerned that the supplier will leave them short of stock.
And financial control – what if the customer doesn’t control their inventory very well?
So reading that back, here is a short checklist for checking client fit:
- The customer needs to buy in sufficient volume to make it worthwhile for the supplier
- The customer needs to be open to sharing information and providing access
- The supplier needs to be confident that the customer has proper inventory control and discipline for both issues and returns to store
- The customer needs to be confident that the supplier won’t leave them short of stock
- The supplier needs to be confident that the customer either plans their maintenance (e.g. shutdowns) or doesn’t use the storeroom for supply during those events
- The supplier needs to address the usual commercial risks to be sure that they get paid!
I trust that those of you who are customers can see how this checklist can be used from your perspective. Are you an attractive and low risk option for the supplier?