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Vendor-Managed Inventory
Part 1 of 4

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Lean Manufacturing Articles

Having a supplier manage some of your inventory at your own location sounds like a great idea. Wow, just think— someone to take some of the heat and pressure off by handling those important but often low-dollar items. This value-added service frees up some of the planner and/or buyer's time to take on more strategic projects. The sup­plier is responsible for the supply levels and maintaining sufficient stock at all times. The supplier is responsible for reporting requirements specified by the buying orga­nization such as usage data and potential product obso­lescence. Sounds simple, huh? Poking a little deeper, one finds there is a whole lot more to this than meets the eye. Unfortunately, many organizations, both customer and supplier, are jumping in without much up-front plan­ning. They are experiencing many frustrations along with many costly errors or breakdowns in a program that should offer early success and benefits for both parties. Others are really thinking out the entire process and are reaping benefits such as reduced inventory levels on items in the stocking program.


Under the supplier-managed inventory agreement, the supplier sells inventory to the customer, provides some form of storage unit for which there may or may not be a charge, fills storage units on a regular basis to meet the customer's demand pattern, maintains accurate data for decision-making on inventory levels and products, delivers material, handles the receiving function, counts and puts away material, and performs any necessary on-site counts such as cycle counting or wall-to-wall inven­tory counts. The vendor-managed program may offer all or part of these services.


Why consider a supplier-managed inventory program in an organization? What is the return on investment? With organizations considering how to manage heavy workloads, more and more customers are asking them­selves, "Where can my supplier add value?"

The buyer/planner function needs to take its place as a more strategic element in the organization and move away from the tactical aspects of the position or posi­tions. Time is an important consideration when discuss­ing a VMI program. Either the supplier or those within the organization who are pushing for such a program need to evaluate how many hours a week are spent on handling the ordering, receiving, counting, and docu­menting of items that are under consideration. A dollar value needs to be placed on the cost of these efforts, even if an arbitrary number. There is also an opportu­nity cost to add into these numbers. What new oppor­tunities for savings, inventory reductions, negotiations, etc. could be accomplished with the release of time to buyer/planners to take on new challenges?

There is a cost savings factor to consider. The sup­plier will be receiving product, counting, performing the receiving function, and storing material in designated warehouse locations. Thus the supplier is eliminating the need for the customer to provide these functions in-house. It is therefore necessary to calculate what these services are costing an organization on the particular products to be included in the VMI program. The cus­tomer must also review transportation costs on all VMI potential products and document how many orders per year and at what delivery cost per receipt. Those respon­sible for the VMI program must identify what it costs to receive a shipment into the receiving area, what is a normal freight charge, the cost to count and put away, the cost to cycle count or include in a wall-to-wall in­ventory count. How long to move products from the receiving area to the stocking location?

The VMI process will also reduce the number of pur­chase orders placed per item per year. The customer must identify the average administrative cost to place a pur­chase order, cut an invoice, and perform an incoming quality inspection in his/her organization. Based on the final agreement on how these documents will be gener­ated, a final cost savings on administrative functions may be calculated.

To Be Continued

For balance of this article, click on the below link:

Lean Manufacturing Articles and click on Series 14

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