This is the first part of a four-part article on Vendor Managed Inventory.

Imagine if an end user never needed to count its inventory. Instead, the end user’s distributor performed the count and constantly maintained the product supply according to previously agreed-upon numbers.

The customer wouldn’t need to place emergency phone calls requesting additional products, and the distributor wouldn’t worry about competitors stealing away business. That sounds like a lifelong customer, right?

“If a customer is never out of anything, how can a [competing distributor] get in on them?” says Bob Hestenes, president of STEP1 Software Solutions in Newbury Park, California. “Usually, if you’re trying to get in on an new account, the first thing you’ll walk in and say is, ‘Do you need anything?’”

With this approach to inventory, called Vendor Managed Inventory (VMI), the answer to that question will always be no. The customer saves time because it’s not managing its own inventory. The distributor never worries about losing the customer. It’s a win-win, VMI proponents say.

“It gives you a piece of mind that you have that business,” says Chris Raffo, president of Universal Business Systems, Inc., in Somerville, New Jersey.

For some jan/san distributors, VMI is simply what they’ve always done — maybe just with a pen and paper instead of a smartphone and tablet. But for other distributors, who haven’t heard of VMI or worry it would put too much strain on a sales representative’s time, VMI can be a path to increased margins or a tool to entice new customers. And new technology is changing the process in ways that might make it time for distributors to take another look.

VMI works by having a distributor sales rep go out and physically count a customer’s inventory every week or two weeks. In the past, the sales rep would take down the customer’s inventory needs on an order pad, then either call in the order or go back to the office and fill the order.

Today, several software manufacturers offer programs that allow the sales rep to punch inventory numbers directly into a smartphone or tablet while in the customer’s storeroom. Depending on the agreed upon arrangement, the sales rep can either enter the number of each product needed or the number of each product on the shelf. The latter works when the customer and the distributor have created target numbers, called “par levels,” or minimum and maximum numbers that the customer wants on the shelf for each product. For example, if the par level is set at five for a product, then when the sales rep records in the software that there are only two of that item on the shelf, three of the item would be automatically added to an order.

Although VMI is widely used in some other distribution industries, such as paper/packaging, not all jan/san distributors have adopted the approach. There are a few reasons for this.

First, VMI simply hasn’t crossed the minds of many jan/san distributors as a viable solution, says Hestenes. VMI is not a new approach, so most distributors are familiar with it; they just haven’t had the inclination to try it. But when they do, they usually stick with it.

“I think a lot of it is simply distributors that are aware of the concept, that have dabbled with it, are sold on it,” he says.

Other distributors may know about VMI, but they think they place too many special orders for VMI to make sense.

“There’s a pretty high incidence of, ‘Here, I’m buying these 10 things that I buy every month, but I’m also buying these two things,” says Adam Waller, president of DDI System, headquartered in Newtown, Connecticut.

Yes, special orders don’t mix well with VMI, but those regularly purchased items are what make jan/san a good fit for such a program. In jan/san, an average end user usually purchases about 200 products a year, but 50 to 75 of those items are “repeat buys,” says Waller.

For many of DDI’s distributor customers, the order frequency criteria for a repeat buy is four times a year. If an end user has 50 to 75 of those products, VMI makes sense, says Waller.

Additionally, special orders tend to be an exaggerated concern, because, with VMI, a distributor sales rep is still calling on that customer, often with even greater frequency. Since the sales rep is still visiting the customer regularly — only now the sales rep is there to count inventory, as well — the sales rep can easily check with the customer to see if there are any special orders.

next page of this article:
What Is VMI And How Does It Benefit Distributors?