Evaluation of the economic benefits of VMI – Part 1

Whether used for manufacturing, subcontracting or maintenance repair (MRO), supplier-controlled inventory drives efficiencies while providing significant cash flow and capital requirements benefits. VMI is an indispensable element of many companies’ demand-driven supply chain program because it aligns business goals and streamlines supply chain operations for both suppliers and their customers.

In the case of the shipping inventory, the customer holds a supplier-owned inventory on site and only purchases stock when it is consumed. Storing inventory to the local warehouse reduced inventory risk and repeated operating costs while smoothing the effect of uneven demand. The ownership of the warehouse remains with the seller, production lines focus on their core tasks, companies manage cash and capital better and still benefit from supply chain management.

Shipping releases significant amounts of working capital for the customer, while the supplier retains full control over replenishment and is effortless through a traditional ordering cycle.

How do we quantify the long-term business benefits of closer and more effective customer-supplier collaboration? In fact, we really can’t. VMI is a rising tide that lifts both boats, a win-win partnership that delivers many non-tangible benefits based on mutual goodwill, enlightened self-interest, smarter planning and most favorite status.

So how do we quantify the value of a vendor-managed inventory program? In fact, there are several important economic effects that deserve careful study. Let’s look at these areas.

Take as an example a hypothetical company we would call: Far & Wide International. Fair & Wide is a large discrete manufacturer with the following profile in relation to one of its major suppliers:

Inventory on hand: $ 1.0 million

Number of Inventories from Supplier: 5,000

Storage space: 5,500 SF

Stock cost / SF: $ 3.10

Deficiency per Month: 50

Obsolescence: 8%

PO lines created per Month: 150

PO changes per Month: 85

Off-contract POs are created per. Month: 95

% of inventory converted to VMI: 50%

Note that Far & Wide estimates the percentage of inventory to be converted to VMI at 50%. We need to remember to only make our estimates based on this available VMI inventory.

VMI is changing the traditional ordering process; Instead of sending purchase orders, customers electronically send daily demand information to the supplier. The supplier generates filling orders for the customer based on this demand information. The process is guided by mutually agreed targets for customer inventory levels, filling speeds and transaction costs.