Progressive Distributor - STAFDA - Build customer loyalty through vendor-managed inventory

Build customer loyalty through vendor-managed inventory

by Rick Peterson, STAFDA President

Distribution managers around the country have been grinding their teeth at night as their budgets for transportation have skyrocketed. One more call from an important customer who needs just a small bag of those widgets to keep their line from going down because their material planners forgot to order safety stock. Oh, by the way, they are 30 miles north of your distribution center, and the V-8 in your truck is going to slurp down gallons of gas for the round trip. Now, how much did that $100 expedited order of widgets really cost to deliver? First, you’re paying your salesperson a commission, your driver will be out for a couple of hours in afternoon traffic and, at 12 mpg, you’ve just spent $20 for gas!

Might there be a better way? Of course there is. There have been many names used for it, but my favorite expression for this is “minimizing the Total Cost of Supply.” Vendor-Managed Inventory (VMI) – also known as Kanban, Auto-Replenishment, Keep-Fill or Bin-Stock – can accomplish this. Key components of the total cost include product quality, purchasing and receiving transaction costs, logistics costs and the purchase price of the materials themselves. With the greatly increased forward visibility that comes with Vendor-Managed Inventory systems, all of the above factors can be significantly reduced. The final and most important factor that can be eliminated is the danger of going line-down due to product shortages. With a proper replenishment program in place, the traditional weekly “fire drill” can be eliminated.

VMI in action
Over the past 20 years, All-West Fasteners has implemented many VMI programs for large OEMs and contract manufacturers – in both the electronics and industrial fields. In its simplest form, your customer provides a list of items for you to supply to their facility and you, the distributor, based on predetermined usage projections and acceptable minimum “safety stock” quantities, manage the inventory and deliver the products to their assembly line.

In an OEM/manufacturing environment, VMI is perfect for low-cost-per-unit items such as fasteners, hardware and other items that are typically “expensed,” rather than tracked by your customer. Anything you sell that has reasonable usage predictability is a candidate for you to manage. For commodity parts such as screws, washers, or nuts and bolts, professional purchasing folks don’t need to waste their time monitoring the inventory if they have you to do it instead.

The specific details of a VMI program are very flexible. Just work with your customer to determine what days and times are best to check stock in the supply cabinets. Some customers have secured environments where your delivery driver must be signed in, and in some high-tech environments, even suited up with anti-static clothing to enter the plant floor. We use a handheld scanner that the driver uses to scan each item that has fallen below pre-set “minimums.” The order is uploaded into our system and a restocking order is created for the next scheduled delivery. All contract items have been pre-packaged in our warehouse, so the order is filled quickly and accurately.

A carefully crafted supply agreement for the VMI program is essential. We use a standard “boilerplate” agreement which includes pricing, minimums, re-order quantity, delivery methodology, terms and termination. We have implemented VMI programs in a cross-section of industries, and have found that once the program is up and running, our customers always appreciate the value.

If you haven’t done so already, take a closer look to determine if a VMI program with select customers makes sense for your company. It might help your customers lower their total supply costs and help you ease the pain caused by escalating transportation costs.