VMI – Vendor Managed Inventory – Is It Right For Your Business?

“A supplier approached me to sign up for their vendor managed inventory control program. They are telling me it will save me a lot of money by letting them determine the quantities I need from month to month. I won’t have a lot of money tied up in inventory as I pay for it when it leaves my shop even though it is stored on my shelves. It remains their inventory until I use it but I have it available when I need it instead of having it ordered and shipped. Can you provide the same program?”

VMI programs are great for a lot of businesses by not worrying about having the right things for delivery when you need them. A vendor stocks his inventory in your warehouse and only charges you when you use it as opposed to having it sit in his warehouse. Many commodity businesses benefit greatly from this. It saves warehouse costs for the vendor and benefits the user having materials available when they need it, but there are some pitfalls.

Sales volumes of products must be large enough to justify a person to control inventory at remote locations. The savings of warehouse space, logistics, and other overhead costs are offset by the management of the assets held by the customer. That may mean additional people traveling between locations to keep tabs on the physical inventory, the cost of providing a system to account for transactions, and all associated costs involved in that side of the program.

Companies are moving a high-volume product line like beer, soda, various household goods, and other commodities. We need to emphasize “commodities” which means high volumes so the costs of managing them are spread over a large number of items. If the volume isn’t there, and inventory turns over at a slower pace, the vendors carrying costs go up, and subsequently your costs for materials increase. We’re seeing pricing levels for VMI programs in our industry of lining and coating 30% to 40% higher than our pricing levels to the same customers. Why is that do you ask?

Let’s look at a customer like COSTCO or SAM’S who go through 100,000’s of units of an item every month as opposed to a lining contractor who may use a wide range of lining products at levels of 1000 feet of materials or less per month. Just the salary of a person coming by once a month to invoice and collect for 1000’ of lining materials would cost both the vendor and the user more money as opposed to letting the user determine when to order materials.

Further, our materials are not classified as being in the commodity range. In other words, we have no users who can predict that he will sell roughly the same quantities by size every month to develop a pattern to fill orders. This works when the vendor can predict what a user will use based on what they sold the months before but none of our users can say that their customers will buy repeat products monthly. Their customers are usually one and done. You don’t line sewer pipe over and over periodically throughout the year. If you have a static monthly inventory order that doesn’t vary more than a few percentage points each month, this is a great plan for you. If not, it may be more costly.

To evaluate whether this program is right for you, ask for what they intend to stock in your location and ask for the pricing levels and how they are going to release it to you.

For more information contact Pipe Lining Supply at +1-888-354-6464 or email us at info@pipeliningsupply.com.

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