This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
A well-run vendor-managed inventory (VMI) program could allow your business to speed up its cash flow by more closely matching your cash outlay for inventory with your cash inflows from sales and other income-generating activities.
By tapping into the expertise of your vendors, your business may be able to:
Companies that offer VMI programs, such as OFFWIRE (distributor of wireless accessories to mobile phone retailers) and Universal Pallet Supply Inc. (shipping pallet and crate manufacturer) also promote these benefits to their customers:
VMI is an arrangement in which a vendor manages your company’s inventory of designated items, rather than you or your staff making decisions about what to purchase and when to place orders. Typically, the vendor handles day-to-day execution of inventory plans using information such as:
Payment terms may vary; payment may be due upon:
The concept of vendor-managed inventory can be applied to various situations, ranging from keeping an office supply room stocked for a small business to organizing large-scale merchandising programs at major retailers.
Depending on its customer base and business niche, vendors may
OFFWIRE, for example, determines product mix and quantities needed by its customers and ships directly to stores on a weekly basis; the company also monitors the program intensively for customers new to VMI and later through periodic reviews. Similarly, Universal Pallet Supply Inc. monitors its customers’ inventory levels on a weekly basis, tracks returns, and makes and delivers pallets to meet customers’ needs; and Fastenal provides on-site inventory management of MRO (manufacturing, repair and operations) supplies for manufacturers.
A successful program requires collaboration and trust between your business and the vendor managing your inventory. Ideally, the vendor will have unique, competitive insights into your industry and your business. This deep understanding may likely be developed by servicing your company and others with similar operations.
Some vendors may have certain standards for customers such as minimums for annual purchasing volumes and a good credit history. OFFWIRE requires its customers to be sound financially and have inventory controls in place, such as a weekly count and reconciliation with administrative records.
Setting up a VMI program should involve dialogue about
Typically, the set-up will require some sort of electronic information exchange between you and your vendor, followed by an analysis (often with specialized VMI software) that initiates shipment of items to your business. For example, OFFWIRE extracts POS data from its customers, uses a software program (SCP 4.0 by Jada Management Systems) to aid in developing orders appropriate for each location, and ships product on a weekly basis.
As a business owner, your biggest concern is likely whether your vendor can manage inventory more effectively than you or your staff can. Specific risks include:
To mitigate risks, set VMI performance targets with timelines and consider structuring agreements to limit or end your involvement if vendors do not deliver targeted results.
You can evaluate program effectiveness by establishing and monitoring performance prior to VMI implementation and after implementation on a regular basis. Indicators may include:
The vendor may have measurement tools in place to demonstrate the value of the program and to assess its performance for the purpose of making continuous improvements. OFFWIRE offers a report card that measures two key metrics: attachment rate (accessories sold per unit sold); and profitability by attachment. Following the VMI implementation, the company reviews these metrics on a weekly basis and initiates calls to discuss any concerns. As a result, problems are quickly addressed and customers can see results in terms of increased sales and profitability.
If managing your inventory has been a costly burden or if you’d like to improve inventory performance and accelerate cash flow, ask your vendor about VMI programs.
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