Many people outside of the Supply Chain world think of the Purchasing department as a function to simply obtain the lowest possible unit cost for the goods and services we need. Although there is some grain of truth in a traditional definition such as this, we in the Supply Chain world understand it to be much more.
From a Supply Chain Professionals point of view, we see our role in purchasing activities much differently. It is about increasing the overall value provided to our organization through our network of vendors. This is sometime due to the low unit cost of purchases, but also more likely due to a lower overall total cost of ownership, additional subject matter expertise provided to us by our key vendor partnerships, or by lowering the management cost of operating this functional area. And when it comes to this last item, vendor managed inventory (VMI) is one tool that has become relatively commonplace in organizations to remove the “hassle” and cost of managing low dollar value purchases.
So, why the big deal? This concept has been around for years, right?
Although the concept of vendor managed inventory is certainly not new to most organizations, there are some inherent risks associated with VMI that are sometimes overlooked. First of all, this Supply Chain “tool” is often used for the management and replenishment of MRO (Maintenance, Repair, and Operations) inventories, and in particular, consumable supplies. And although it is true that the purchase of these items tend to be in the lower dollar volume categories, they often lack close management, and can “get away from the organization”, adding up to unnecessary cost, and an opportunity left unrealized.
Why is this so?
Well, for one thing, we are so focused on our major cost categories, analyzing them over and over again, that there is often not as much opportunity to improve in these areas as we may perceive. And while we are focused on “the big bucks”, we neglect to reap the rewards of the low hanging fruit that may exist in our MRO expenditures. In fact, most purchasing people talk of their worth to the organization in relation to the amount of dollar spend they are responsible for, do they not? VMI inventory systems, in many cases, further remove us from these activities, making it even more difficult to see the opportunity and harvest this low hanging fruit.
Another possible risk associated with VMI lies in the implementation of the vending machine concept as a means to utilize vendor managed inventory. These machines, often provided to us from our suppliers, allow for the tracking of consumption, as well as the opportunity to restrict certain supplies to those who really need them. The general idea being that these features result in a drastic reduction in consumption of consumable supplies.
While the vending machine approach can yield positive results for an organization, we need to be aware that when provided with a machine from our supplier, that it is their product that goes into the machine, and we need to make sure that the original product costs are competitive, and that prices do not begin to escalate after the agreement is in place, eroding the original value expected from implementation.
Although there is no disputing the fact that a vendor managed inventory approach can provide significant benefits to an organization, like many things, the devil is in the details, and we need to pay close attention not only to our original analysis, but to how we implement, and when and where we review results to ensure we continue to get the value originally anticipated.