VMI BENEFITS TO THE SUPPLIER

Although we typically see Vendor Managed Inventory (VMI) relationships pursued by the buyer, there are also substantial bottom line benefits to the supplier. It can substantially increase supplier profitability as a result of:

• Increased sales

• Reduced operating costs

• Stronger customer relationships

Increased Sales

 
Many suppliers pursue Vendor Managed Inventory (VMI) relationships as a strategic initiative to build stronger customer relationships. Others do it as part of their move to a lean, demand-driven supply chain. Most suppliers, however, find that the quickest benefit is actually increased sales.
Many suppliers see an increase in sales of 5 - 25% because of a combination of one or more factors:

• Increased sales of products already carried by the customer due to:

  • Fewer customer stock-outs

  • Improved product mix based on better demand visibility.

• Increased market share due to:

  • Increased breadth of product carried by the customer because the customer realizes higher profitability, lower costs, and/or better service with the supplier's products.

  • Transfer of customer purchases from narrow line suppliers to larger suppliers offering comprehensive, value-added programs like VMI.

• Continued sales growth due to:

  • Better collaborative planning for promotions, new product introductions (NPI), and exceptional demand (such as project work) etc. enabling the supplier to take better advantage of special sales opportunities.

Reduced Operating Costs

Even though the supplier takes on the responsibility for replenishment in a VMI relationship, the savings in operating costs alone can easily offset the costs of doing VMI.
Tactical cost savings opportunities include reduced administrative and operating costs due to:

• Fewer order problems caused by bad data (e.g. mistaken change to catalog #, mismatch in carton size). The use of common data and more frequent/rich exchange of information eliminates many of these problems.

• Fewer emergency orders due to poor customer ordering habits (e.g. expedites due to stock-out).

• Fewer orders overall. A more consistent order process where the supplier regularly evaluates the complete requirements for its customer typically lowers total order count by 4 - 6%. Fewer orders results in downstream savings in warehouse pick time, transportation scheduling, accounts receivable, and invoice reconciliation.

• Fewer returns of 'dead' inventory created by poor customer inventory management or lack of collaboration on product replacements, etc.

• In some cases. reduced transportation costs due to fewer emergency orders and an improved ability to recognize order consolidation opportunities.

Strategic operating cost savings opportunities include reduced finished goods inventory requirements due to reduced demand variability, better forecasts, and better information for Sales & Operations Planning (S&OP).

• Better visibility of 'normal' demand due to frequent orders aligned with actual demand (this helps reduce the bullwhip effect).

• Earlier visibility of exceptional demand due to better communication with customers about upcoming special activity, such as project work, local promotions, etc. (this helps in planning leveled production).

• Immediate visibility of actual demand in early days of New Product Introduction (NPI).

Note: Strategic operating cost savings are one of the biggest potential benefits of VMI once a substantial portion of business for particular items or item groups is done through VMI

Stronger Customer Relationships

VMI is one of the best tools available to suppliers for building stronger customer relationships. Close customer relationships help to reduce the cost of sales while at the same time helping to protect and grow market share. In particular, VMI helps a supplier:

• Achieve 'Preferred Supplier' status by:

  • Providing bottom line benefits to customers (see customer benefits).

  • Being 'easy to do business with' (i.e. reduced cost, time, and effort for the customer).

• Achieve 'Strategic Partner' status by providing the opportunity and information to talk with the customer about operational/P&L issues - not just product & price (i.e. "show the customer things about themselves they didn't even know").

These are strategic benefits that may be harder to put a specific dollar value on than the benefits of increased near- and mid-term sales and reduced operating costs, but best-in-class suppliers know that strong customer relationships are an invaluable key to their long-term success.

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