How to Structure the Right Industrial Vending Contract for Your Needs (VMI vs. CMI)

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1 By Rick Barrera How to Structure the Right Industrial Vending Contract for Your Needs (VMI vs. CMI) The benefits of vending are well known an immediate 0%-40% reduction in consumption, better inventory control, fewer stock-outs and much less paperwork. So why not just jump in? Because, when it comes to choosing a vending system, you have to think beyond hardware and software. You also need to give serious consideration to who owns the system and who fills the machines. There are 4 basic business models for vending systems but the most important lessons to take away from this article are: You are the customer and you can design the system and the business model that serves your needs best. Everything is negotiable. Ask for what you want and horse trade until you get it. The more inventory you put through the system, the more flexible your suppliers will be. With that foundation, let s look at the four basic business models for vending: The distributor owns the machine and is responsible for installing, maintaining and the original model for industrial vending and why it is still the most popular model. filling the machine. There are many benefits a. One variation on this model is a to this model. The distributor takes the user consigned inventory agreement where out of the vending and inventory management the user is not invoiced for inventory until business altogether. Users can focus completely the inventory is used. This arraignment, at on their core business without ever having first blush, seems ideal since the user has to think about inventory. This is a huge essentially no purchasing or carrying cost competitive advantage for users if they can for any inventory until the moment of use. take full advantage of their newfound focus But if you think about this model for just and redirect their energies and people to more a minute, you will quickly realize that the productive and profitable tasks. There are also distributor has to build these costs into his huge cost savings in purchasing, receiving, pricing, so the end user ultimately pays carrying costs, accounts payable management these costs and sometimes more, to cover and the elimination of obsolete inventory. the distributor s risk. Despite the higher Dozens or hundreds of purchases and invoices item costs, you may still enjoy significant per month are reduced to a single invoice. This net savings because of the increased extensive list of benefits explains why this was efficiency of having a professional vending inventory manager in control of your system.

2 b. The second option is user owned inventory. The downside of this approach is that the distributor has less incentive to manage inventory tightly, but the upside is that the pricing for user owned inventory can be much lower because the distributor is relieved of the inventory risk, making this option preferable for many end users. The user owns the machine (through purchase or lease) and is responsible for maintaining and filling the machine, which is installed by the vending manufacturer. The benefits of this model include greater control over the machine, its placement and its inventory, especially if the user wants to fill the machine with items from various distributors or suppliers. The long-term cost of the machine may also be lower because industrial vending machines often have useful lives of 0 or more years (although their computer technology may need to be upgraded from time to time). Among companies that use this model, there is often a belief that the user will have a greater ability to pit one supplier against another to lower costs. But these savings rarely materialize because users don t take into consideration the costs of their time to negotiate these concessions and then renegotiate them with each buy, as well as their time to issues purchase orders, receive and physically handle the inventory and restock the machine. Because users often do not have a dedicated vending team, the reality is that they usually do not attend to the details of vending (frequent replenishment, database maintenance, software upgrades and rapid adaptability to changes in inventory requirements) with the same speed, expertise and focus that a strong vending partner would, resulting in fewer real savings. For those committed companies who are willing to train a dedicated vending person or team, this model can work well. An Integrator installs, maintains, and fills the customer-owned or integrator-owned machine and because of their purchasing power, buys effectively from all sources and passes the inventory costs through with little or no markup. But this model is not free. Integrators charge a fee to manage the system and provide access to their suppliers. For the highest volume users, this approach may be preferred because the savings can be substantial and you are freed up to focus on what you do best. Integrators generally are interested in only the largest accounts, so this may not be an option for a smaller user.

3 4 The hybrid model, now being employed by more sophisticated players (both distributors and users), is to mix-and-match these models in a negotiated agreement that provides exactly what the end user needs. For example, some inventory in the system may be consigned, while other inventory is customer owned. Some distributors will build the cost of the system into the item pricing to pay for the cost of the lease or to allow the customer to own the system over time. Be clear about one thing. There are NO FREE MACHINES. There are legitimate Zero-Outof-Pocket deals that make sense, however. You will be paying for the machine one way or another, but as long as you understand the mechanism for this, you should do what is in your best interest. Sometimes your company would rather capitalize the system, other times it makes more sense to increase cashflow by paying for the machine (with savings) through a lease or by integrating the price of the system into the price of the products you buy. Transparency is the key. You need to understand what you are paying for and where the costs for the system are being borne. What s Right for YOU? Start by learning about the various types of machines and software. A great deal on the wrong machine or software can be very costly in the long run. Get clear on exactly what you want to achieve with the system over time, not just immediately. Evaluate the quality and reputation of the distributor, independent of vending. A bad distributor without vending will be a horrible distributor with vending. Vending management requires greater discipline and management skill, not less. Great vending distributors must first be great distributors at their core. Check with the distributor s customers to learn about their vending experiences before committing to a vending distributor. The great distributors have plenty of happy accounts and nothing to hide. They are proud to introduce you to their customers, who will gladly tout their successes. Red Flags: They ask you to buy more- Remember that the GOAL of a great vending program should be to better manage inventory and to CUT COSTS, so any distributor that is requiring you to buy more is THE WRONG PARTNER! They won t give you your data- Another red flag should be a distributor who does not let you see and own your own data that is generated by the system. The reports and data are where the real savings come from, especially as you gain a greater understanding about your usage and costs over time. If you can t see and own your own data, RUN! They are the wrong vending partner! Hidden fees or excessive shipping charges- Make sure that you have a contract that clearly spells out ALL of the fees and charges. Unscrupulous distributors often have hidden fees or exorbitant shipping charges that will kill your bottom line and destroy any savings from vending!

4 4 Repackaging- Repackaging is like a hidden tax that saps cost savings from your vending solution. Occasionally, some items may require repackaging, but many distributors use cheap vending machines that require much or most of the inventory to be repackaged in order to vend properly. This is very costly because repackaging is all done manually by the distributor, and their high labor costs are built into the price of your purchases! These repackaging fees end up on your bill as shipping charges or other surcharges that can destroy your savings from vending. Many end users have reported shipping or repackaging fees of 9% or more! That means that the more you buy, the less efficient you become. Don t pay this hidden tax! Insist on getting a machine or a solution that does not require repackaging - or at least minimizes repackaging to just a few items. Also remember to look for a partner who has a complete program to add value with vending. A complete vending solution should include: A Program to Control YOUR ENTIRE Inventory, not just fast moving items. A favorite strategy of poor distributors is to get you focused on the 0% of your inventory that turns fastest. The real savings in vending come from managing the slower moving 80% that result in slow and dead inventory (Ouch!) and cause the most stock-outs and shut-downs (Bigger Ouch)! The right vending partner should include strategies, machines and software to manage all or most of your inventory Forced Use of Reconditioned Items- Users can save up to 80% on tooling costs with a well-run reconditioning program using a vending solution that forces the use of reconditioned items before new items. Demand-Based Ordering- As you gather data in the system, you will want to move away from antiquated min/max systems and begin using more sophisticated demand compression algorithms to reduce inventory to an absolute minimum. Users can cut an additional 0-50% from the inventory used to support the system with Demand-Based Ordering. Out-of-Process Alerts- The right vending system can alert you immediately when employees are trying to access inventory they don t need to do their job, when a machine or operator s usage is out of process, or when employees are taking more inventory than they should. This is a significant source of savings from well-run vending program. Gage Calibration Management- This value-added program can save big dollars in rework and customer risk. Usage Reports- Great vending programs drive real and lasting changes in thinking and culture. Changing culture and attitudes requires hard data. Issue AND Return- Managing inventory effectively requires that you are able to both issue and return items. Otherwise, your system is only doing half of the inventory management job, leaving real savings on the table. Forced Use of Older Inventory First- Using older inventory first can save you a fortune in carrying costs. This capability is a must for any effective inventory management program. Compact, powerful, and affordable. The RoboCrib MX50 is the latest innovation by AutoCrib to help businesses meet their industrial vending needs. Up to 80 bins in a foot print smaller than most mini fridges.

5 Great vending partners will help you identify and print the right reports so you can share real data with your production teams to drive costs down permanently. 9 A Clear and Integrated Upgrade Path- As your business grows, so will your vending needs. Make sure that your vending partner has a full-line of machines and solutions to accommodate your growth seamlessly. You don t want to have to switch software or add incompatible machines to your system when you grow. That just creates complications and headaches. Think Apple. Everything should be plug-and-play. The bottom line is that saving significant money with a vending program requires a little bit of homework on your part to choose the right vending partner. Once you have the right partner, you can relax, knowing that they have the expertise to maximize your savings and that you can trust them to minimize your costs because they have your back. The right partner wants you to save big money. They win when you save because they will retain your business for life and you ll have a stronger, more profitable business. The right business model for you is the one that aligns the distributor s interests with yours so that you can maximize your profitability from the vending solution you choose. Rick Barrera is VP of Strategy for AutoCrib, Inc. AutoCrib, Inc. [ delivers the world s broadest line of automated inventory vending systems (software and machines) for manufacturing companies, job shops, airlines, military, retailers, distributors and others who want to provide 4/7 unmanned access to inventory and PPE, while maintaining complete access control and 00% inventory accuracy. AutoCrib software provides real-time information on all inventory in the system from any computer, tablet, or smartphone anywhere on the planet. AutoCrib has been providing industrial vending solutions since 995 and has deployed over 5,000 systems worldwide. AutoCrib manufactures the patented RoboCrib line of robotic carousel systems, AutoLockers, The EleVend, the world s only glove vending machine that doesn t require repackaging for gloves and other PPE, as well as automated cabinets, RFID tag-based vending solutions, handheld scanners, and traditional helix coil vending machines. No other company provides such a variety of point-of-use dispensing technology. AutoCrib systems are driven by AutoCrib s powerful software, which provides end-users with real time usage data and in many cases, updates their ERP systems. This allows manufacturers and cutting tool users to dramatically reduce inventory costs by 50% or more through increased accountability and tighter access control. ### If you would like more information about this topic, or to schedule an interview with Steve Pixley, CEO or Rick Barrera, VP Strategy, please call Rick Barrera at or Rick at rbarrera@autocrib.com 0 S. Croddy Way Santa Ana, California 9704 Toll Free (800) Local (74)