The Differences Between a Consignment & VMI. Which Is The Most Valuable To You?

You can’t decide.

Will a vendor consignment or a vendor managed inventory be the best option for your aircraft material needs? 

These terms get thrown around interchangeably, but they’re different. We wouldn’t call a zebra a lion now would we?

Skylink, VMI, Consignment

Skylink, VMI, Consignment

Let’s take a look at the relationship of these two inventory strategies…

Relationship Between a VMI and Consignment

There’s a ton of confusion when it comes to the relationship between vendor-managed inventory and consignment inventory.

A VMI is when your vendor is managing the supply of your inventory. Whereas, a consignment relates to the ownership of the inventory. Neither of them is dependent on one another.

You can have a VMI that is not a consignment inventory, you can have a consignment that’s not a VMI, and you can have inventory that is both a VMI and consignment.

If your head is now spinning, let’s explain the more…

What’s a Vendor Managed Inventory (VMI)?

In the International Journal of Advancements in Research & Technology, Assistant Professor Poonam Lakra defined VMI well:

"Vendor-managed inventory (VMI) is a family of business models in which the buyer of a product (business) provides certain information to a vendor (supply chain) supplier of that product and the supplier takes full responsibility for maintaining an agreed inventory of the material, usually at the buyer’s consumption location (usually a store). A third-party logistics provider can also be involved to make sure that the buyer has the required level of inventory by adjusting the demand and supply gaps. Vendor-Managed Inventory (VMI) is a planning and management system that is not directly tied to inventory ownership.”

Let’s say you need 500 high demand consumables, in stock, at all times.

It get’s really difficult to source, process, and chase these items every time your inventory runs low or is depleted.

At Skylink, we make this process as simple as possible for our customers. You and a Dedicated Account Manager, would come up with a predetermined forecast for your material needs. A minimum stock level would be set and an initial provision would be sent to you. Once you hit your minimum stock level, an automatic replenishment would be sent by Skylink.

Overtime, Skylink monitors your consumption patterns and adjusts your stock levels.

With that example, Skylink manages the supply of your inventory. Once it’s at your “stores” you own the material.

Benefits of a VMI

Based on the journal; “The comparative study of consignment and vendor managed inventory with special reference of cost structure,” Poonam Lakra outlines 4 key benefits to a VMI:

  1. Improved customer service. By receiving timely information directly from cash registers, suppliers can better respond to customers’ inventory needs in terms of both quantity and location.

  2. Reduced demand uncertainty. By constantly monitoring customers’ inventory and demand stream, the number of large, unexpected customer orders will dwindle, or disappear altogether.

  3. Reduced inventory requirements. By knowing exactly how much inventory the customer is carrying, a supplier’s own inventory requirements are reduced since the need for excess stock to buffer against uncertainty is reduced or eliminated.

  4. Reduced costs. To mitigate the up-front costs that VMI demands, Fox suggests that manufacturers reduce costs by reengineering and merging their order fulfillment and Distribution Center replenishment activities.

You should also reference a past post we wrote on 10 Critical Signs You Need a VMI.

When To Use a VMI & Some Downsides

You should use a VMI when your inventory has gotten out of control.

You’re spending too much time and money sourcing, processing and chasing orders. You’re constantly out of stock for high usage material, or you’re overstocked, unnecessarily tying up capital to poor planned inventory.

Keep in mind what your core activities are. If manning inventory is not one of them, you should adopt a VMI solution.

Just know that it does come with some downsides. The biggest one is you’ll be giving up control of part of your business. You must make sure you trust your VMI partner. Do not make the mistake of thinking a bigger partner (OEM) is better. That is surely not the case.

What Is a Vendor Consignment? defines a consignment inventory as “…inventory that is in the possession of the customer, but is still owned by the supplier. In other words, the supplier places some of his inventory in his customer’s possession (in their store or warehouse) and allows them to sell or consume directly from his stock. The customer purchases the inventory only after he has resold or consumed it.”

There are many approaches to a consignment.

A simplified example would be if Skylink stored 100 high usage items at your facility. As they were consumed you’d then be billed.

Benefits of a Vendor Consignment

The benefits are obvious. You will not have to tie up capital to inventory. However, this does not mean that you will not have carrying costs. You’ll still incur costs related to storing and managing the inventory.

The consignment inventory model is most effective with service parts for critical equipment where you would not stock certain service parts due to budget constraints or demand uncertainty. The consignment inventory will allow your supplier to provide a higher service level (by having the parts immediately available) and save expedited processing and freight costs.

A Word of Caution About Vendor Consignments

A consignment inventory should not be used just for a localized cost-cutting tactic. This is where you would decide to pressure your supplier into providing consignment inventory to eliminate your investment in inventory.

In these situations, you would already be stocking aircraft material and use this leverage over your supplier to reduce his costs. While this may reduce your costs, it’s just moving these costs from you to the supplier. A consignment inventory will add these costs to the supply chain. There’s always additional costs associated with managing the consignment process. The supply chain will have to absorb more costs without any meaningful benefit and you’ll eventually pay for it. Be careful!

Now you know the differences between a vendor consignment and VMI inventory strategy. You’ve read the benefits and the downfalls. Now what?

It’s time to have a discussion with your material partner.

And remember--Never Forget Your Wings.

Are you having inventory problems? Tell us your story in the comment below.