Is a VMI strategy right for me?

Manufacturing professionals: Are you buying parts and other raw material inventory for your factory just to have it sit for weeks or months prior to consumption?

By holding this inventory on your books, you’re doling out money for assets that won’t turn into cash any time soon.VMI

One remedy: Work with your suppliers to institute a vendor managed inventory (VMI) model.

A VMI strategy alters the traditional purchase order process. Rather than invoices, you would send daily demand signals to your suppliers, or a third party logistics (3PL) partner like Kanban. Replenishment orders would be triggered based on this data.  Suppliers themselves would ensure sufficient inventory is available to support daily manufacturing needs and they would retain ownership of the inventory until consumed. This immediately reduces your inventory and improves your cash flow.

3PLs can help implement a VMI strategy

3PLs like Kanban can help enable a VMI model by:

  • Operating the inbound logistics warehouse for multiple suppliers
  • Accurately managing inventory and replenishment
  • Providing secure online access to inventory – for you, who would see all suppliers’ inventory, and for suppliers, who would have secure access to just their SKUs

What are the benefits of VMI?

  • Improve cash flow – pay for goods only when they ship.
  • Reduce risk – having inventory close by provides a hedge against weather-related delays or quality problems that may necessitate re-ordering from a distant source.
  • Reduce inbound receiving costs – when inventory from multiple suppliers is held at a single facility, predictable deliveries to your plant allow you to plan for an efficient receiving process.

VMI strategy: Only for the big boys?

Some smaller manufacturers hesitate to adopt a VMI strategy for fear of alienating suppliers, who may perceive the move as simply pushing costs back upstream in the supply chain. But VMI can be beneficial to suppliers as well.   Think about it.  Suppliers carry this inventory somewhere, often at a cost greater than they would incur at a 3PL warehouse near your factory. Also, suppliers can position inventory closer to you and reduce transportation costs.

VMI part of an overall plant services strategy

A VMI strategy is one component of an overall approach to plant services in support of manufacturing operations.  3PLs are often key operating partners in manufacturing logistics solutions, providing the warehouses, trucks, systems and know-how to make it all happen.  We discuss this in our free eBook:  Essential Logistics Strategies to Improve Plant Throughput and Financial Performance.

 

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