A healthy business deal benefits both parties, with neither getting something at the expense of the other. VMI’s, if done correctly, fulfill this for both customer and supplier.
So while benefits for a VMI are weighted towards the customer, there are plenty for the vendor as well.
In manufacturing, information tends to flow upstream, meaning information-sharing down the supply chain can be much harder to come by. In order to have the best chance of both supplier and customer reducing risks, while also meeting objectives such as constant supply and low price, information sharing is necessary. The more the vendor knows about forecasts, usage, and line plans, the better they can prepare and react to these changes and help the customer.
However, information tends to flow up stream, not the other way.
Vendor Managed Inventory can be a method of obtaining information for a supplier. A supplier delivering though a VMI will have first-hand knowledge of usage rates and current inventory. From this they can better forecast and plan supply chains to keep the customer producing.
Lower Risk and Best Price
Vendor managed programs also help lower risk for suppliers. In order to ensure that the customer never runs out of product, regardless of usage variation, suppliers must keep a large amount of stock on hand.
This is risky.
- What if the line shuts down?
- What if the part undergoes a revision?
- What if the businesses is given to a competitor?
Getting stuck with inventory for a supplier can be detrimental. With thin margins, non-moving inventory can kill an entire year of profits.
The VMI is bundled with a commitment from the customer through agreements or blanket purchase orders that give the supplier confidence to make the inventory investments required. This in turn lowers the risk of the supplier with the inventory they hold.
Beyond this, buying larger quantities offers bulk pricing and enables lower prices for the supplier as well as the customer. So in exchange for a commitment to work with the supplier, a customer receives lower prices and less risk of stock outs.
High Switching Costs
These programs take customer’s time and money to implement.
It takes resources to:
- negotiation terms
- order and stock
- setup facility entry and methods
- implements storage options
These act as a deterrent to switch vendors quickly for the customer. With higher switching costs, the vendor has a tighter relationship with the customer.
It is easy to go online and order almost anything you want today. Getting a longer term commitment can be near impossible. However, a VMI program represents a commitment from both parties to supply excellent parts at excellent prices with excellent service.
When there is a commitment there is also an ability to better serve. Suppliers can find solutions, try innovations, and help serve customers better when they are working from a commitment rather than fear of being dropped at the first sign of trouble.
In all, a properly set up Vendor Managed Inventory program presents both sides with benefits.
Customers can offload a large amount of admin burden and cost while lowering prices and reducing stockouts. They can improve financial metrics and extend payment terms. Where able, VMIs present almost a complete solution for the goals of most commodity teams and procurement departments.
Vendors can work with customers offering larger commitments and a closer working relationship. They can have access to source data on usage and better supply their customers. The best vendors even find ways to improve the customer’s workflow and facilities as they are there first hand on the floor.
Thank you for reading
Procurem is a intelligent procurement platform for the digital age providing software and supply chain services for the engineering focused manufacturer.
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