It’s common business knowledge that excess inventory is a liability, but it’s also common that you can’t sell what you don’t have. Traditional inventory management approaches force you to purchase excess inventory to pad yourself against stock-outs, causing you to carry excess. You literally have to decide what’s worse for your business: running out of inventory or carrying too much.
The inventory model you use right now is challenging:
- The accuracy of your forecast is limited, so you risk buying too much or too little stock.
- You purchase and own the inventory, regardless of whether you sell it.
- You have limited visibility into whether your suppliers can even fulfill your order.
That’s where vendor managed inventory plays an important role…
What is Vendor Managed Inventory (VMI)?
Vendor managed inventory is a close relationship between you and your material partner who works together with you to share the burden of inventory management.
The goal is to make sure you only buy what you’ll use. You’ll maintain close contact with your aircraft material partner, through technology, so that you purchase stock in smaller batches, more frequently and automatically. As you begin to receive stock in smaller batches, the burden of inventory management is shifted from you to your material partner, who pushes inventory to you, based on real-time demand.
Instead of forecasting yearly maintenance projects, or last minute requisitions, and buying a bunch of expendables to ensure your maintenance projects will go as planned, you’ll be in constant communication with your material partner. You constantly push your inventory counts to your material partner, who will constantly maintain your inventory, making frequent, smaller shipments.
The vendor managed inventory is usually handled through modern technology. This technology is called EDI (electronic data interchange) and it hooks up right with your supplier’s ERP system.
Now, that you have the overview of what it VMI is, let’s see if the benefits are right for you.
VMI peaks its head deep into your supply chain and allows your supplier to better optimize planning and replenishment processes. Through this you get improved visibility and control of the total order planning and execution steps. Remember the days when you received a requisition order, you cut 13 POs and then had to process and track all the POs?
The VMI approach helps reduce most of the administration burdens.
Because your supplier holds inventory onsite or near you, it allows you to have instant access to the inventory. This immediate access allows you to pull inventory as you need it and only pay for which you consume. This significantly reduces your inventory investment and increases your inventory turns. Inventory 101.
The VMI approach is about a close partnership and because of this your supplier is responsible for replenishing stock. This includes ordering the inventory, managing the logistics to ship the material, and counting the inventory. Since you’ll be passing these costs that would normally be done by you, you’ll see an overall reduction in your inventory costs and you’ll have the opportunity to reinvest that capital into other parts of your operation.
Because this is all forecasted you’ll pull in inventory needed to meet your maintenance project demand, thus eliminating minimum order quantities. Your supplier may choose to replenish the VMI inventory based on predetermined minimum order quantities internal to their company, but that doesn’t concern you. The inventory liability largely resides with the supplier and they have more of an incentive to eliminate unneeded inventory and costs into the supply chain.
Most people see inventory as a bad thing but in reality, without it, you can’t do your job effectively. The inventory in a VMI program is often an asset worth investing in because it decouples upstream and downstream supply chain partners from random order fluctuations, forecast inaccuracies, and other variations in demand and supply. Inventory in a VMI program can be positioned at the best place for quickly responding to variation in the supply chain and removes the need for each supply chain node to maintain their own buffer of inventory.
This can significantly reduce the overall supply chain inventory and the associated costs of maintaining such inventory.
By having the inventory onsite or near you, it enables you to pull inventory quickly and efficiently based on your maintenance needs, reducing lead-times to zero. Now isn’t that nice.
VMI helps to compensate for the lack of system integration between supply chain partners by allowing inventory to reside within the supplier’s ERP system, until pulled by you. By keeping inventory within the supplier’s system, it provides a more accurate input into the material requirement planning process, as well as provides a more accurate demand history that can be diluted by minimum order quantities and other planning variables. This enables your supplier to more accurately predict your demand and improve delivery performance.
Since inventory is near you, VMI provides a more reliable mechanism for delivery compared to traditional ordering approaches such as discrete POs. By providing a reliable delivery mechanism, VMI removes variability from the delivery process and allows you to improve the delivery of your maintenance projects.
VMI facilitates a pull-based approach that helps prevent excess inventory from being pushed into your supply chain. By reducing the inventory levels within the supply chain, it drives both you and your supplier to quickly identify quality issues in the material because you’re using the inventory close to real-time instead of future maintenance projects. There’s no excess inventory available in the channel to allow maintenance to continue, which traditionally helps mask quality issues.
VMI also promotes a quality conscious culture because the inventory resides on the supplier’s books until pulled by you. Whether people like to admit it or not, a supplier will be more responsive in addressing and resolving a quality issue if the inventory is on their books. It’s a cold hard fact.
When most supply chain professionals discuss VMI, they often quote the benefits as it relates directly to their company. Although these benefits are valid and provide great value to a company, the true significance is often overlooked with this narrowly focused view. The real benefits of VMI relate to driving a lean supply chain that is centered on creating an end-to-end pull system, based on end user demand that cascades through the supply chain.