WHITE PAPER. Vendor Managed Inventory (VMI) is Not Just for A Items

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1 WHITE PAPER Vendr Managed Inventry (VMI) is Nt Just fr A Items Why it s Critical fr Plumbing Manufacturers t als Manage Whlesalers B & C Items

2 Executive Summary Prven Results fr VMI-managed SKUs*: Stck-uts reduced 31% Inventry turns increased 25% Sales Increased 24% *Frm Datalliance study Business Benefits f VMI ask fr a cpy It s a fact, plumbing industry sales vlumes are dwn an average f 30%. Mre than ever, n ne wants t miss a sales pprtunity because a given SKU is ut f stck. The nly way t significantly increase sales is t take greater market share. At the same time, bth manufacturers and whlesalers are lking fr ways t reduce csts and clsely manage cash flw. One way t achieve these bjectives is thrugh better inventry management. Many manufacturers and whlesalers already knw that vendr managed inventry (VMI) is a great way t reduce stck-uts, increase turns, and reduce inventry management csts. Mst als recgnize that VMI ultimately leads t increased sales by enabling a cnsistently high level f custmer service. Yet, even manufacturers wh have lng-established VMI relatinships with key whlesalers are, in many cases, missing an pprtunity. That s because many manufacturers are nly managing their whlesalers A items the 10-20% f items that represent the majrity f demand and ignring the benefits f managing B & C items in the same way. Ignring B & C items leaves manufacturers and their whlesalers vulnerable t a variety f lst sales situatins and higher than necessary inventry investments. This paper utlines: Why manufacturers shuld cnsider expanding their VMI prgrams t include B & C items Why expanding VMI is nw mre imprtant than ever Why full-scale VMI is mre practical tday than it was when mst prgrams were initiated 1

3 The Imprtance f B & C Items t Overall Sales and Prfitability The imprtance f keeping A items in stck and turning quickly is in the frefrnt f everyne s minds. Manufacturers and whlesalers with VMI relatinships mnitr fill rates and turns religiusly fr the relatively few items that are sld almst every day. % Ttal Items/SKU s Frequency f Sales % Demand ($) Inventry Investment A Items 10% High 70% 40% B Items 20% Lw - Medium 20% 20% C Items 70% Lw 10% 40% Mst executives knw that B & C items are als imprtant, but that imprtance may nt be as tp f mind fr items that nly have demand nce r twice a mnth. When yu think abut it, yu knw: B & C items are key t custmer service. Custmers knw they can get cmmn items anywhere, anytime; but they greatly value availability f less cmmn items when they need them. Gd custmer service is a key differentiatr. B & C items may have a significant impact n verall sales. There are lts f bad things that can happen when a B r C item is nt available: The whlesaler might be able t substitute a prduct frm anther manufacturer (making the whlesaler just as happy, but lsing a sale fr the manufacturer). The custmer may g t anther whlesaler where the item is available (making the supplier just as happy, but lsing a sale fr the whlesaler). When the B r C item is nt in stck, the custmer may decide t nt buy the A items they need until they find smene wh has everything available. (pssibly bad fr the whlesaler, the manufacturer, r bth). There s always the chance that the custmer will be satisfied with a different whlesaler s service r a different manufacturer s prduct, cmpunding the lss f the immediate sale with the lss f future sales. Nt just the B r C items, but the A items as well. 2

4 B & C items have the ptential fr greater margins. Because they are nt purchased as ften, custmers are nt as price sensitive when it cmes t B & C items, making them a great pprtunity t increase prfitability fr bth the whlesaler and supplier. Summary: Why B & C items are imprtant: Key t custmer service Significant impact n sales Ptential fr greater margins Large whlesaler inventry investment Backrders are cstly May have mre sales pprtunity B & C items may represent up t 60% f whlesaler inventry investment. B & C items may represent up t 90% f the SKUs and 60% f the inventry investment carried by a whlesaler. Whlesalers wh recgnize the imprtance f having B & C items available when a custmer needs them ften struggle with finding the right balance between inventry levels and custmer service. It s much harder t manage an item that is nly purchased nce r twice a mnth than ne that s purchased nearly every day Rush backrders fr B & C items are just as cstly as rush rders fr A items. When an item is nt available but the custmer is willing t wait, the whlesaler is likely t place a backrder. That seems great, but that rder is likely t be a rush rder, which always carries greater prcessing csts than nrmal replenishment rders. The likelihd fr rush rders fr nn-vmi B & C items is much higher than fr A items which are being replenished n an almst cntinual basis. Whlesalers may never recgnize the pprtunity B r C items represent. If an item is nt in stck when a custmer needs it and it therefre des nt get sld, the whlesaler s recrds may nt ever shw the demand. Because they dn t recgnize that there is demand, they cntinue t nt stck the part, and s d nt have it when the next sales pprtunity ccurs. It becmes a kind f self-fulfilling n apparent demand/n stck/lst sale cycle that may never be recgnized. The Benefits f Managing B & C Items with VMI When yu cnsider the issues abve, it s clear that there are advantages t managing B & C items effectively i.e. using VMI just as yu wuld fr A items: Leverage every sales pprtunity. By increasing whlesaler fill rates fr B & C items, yu nt nly gain the sale f thse items, but ften the sale f the related A items as well. Yur whlesaler imprves custmer service, which shuld imprve custmer lyalty and further increase sales. 3

5 Create barriers t the cmpetitin. By nt pening up the pssibility f substitutin fr a B r C item, yu avid the pssibility f custmers becming accustmed t purchasing anther manufacturer s prducts A, B & C alike. Summary: Benefits f VMI fr B & C items: Leverage every sales pprtunity Create barrier t cmpetitin Expand market share Help reduce verall inventry Reduce distributin csts Expand market share. As the manufacturer, yu knw why yu make the B & C items. Yu knw which f them a whlesaler shuld carry. In a fullscpe VMI relatinship yu have mre pprtunity t shw whlesalers what items they shuld carry in additin t the bvius A items. With brader visibility, yu can help them maintain a mre apprpriate level f inventry fr each individual item cnsidering verall demand. That may help yu replace mre cmpetitrs items with yurs, ultimately building mre sales fr bth yu and yur whlesaler. Help whlesalers reduce inventry investment. With B & C items ften representing nearly 90% f SKUs and 60% f inventry investment, even small imprvements in the verall balance amng thse items can have a psitive impact n turns. And a well-crdinated VMI prcess acrss all items can ften increase A item turns mre than enugh t cmpensate fr B & C item stcking levels that increase verall sales. Reduce yur distributin csts. Its simple - the mre items yu manage with VMI the fewer rush rders yu receive frm yur whlesalers. Yu save all the extra cst that ges alng with the rush rders yu eliminate. Why Yu May Nt Already Be Managing B & C Items with VMI If yu are managing A items with VMI fr key whlesalers but nt B & C items, it s prbably fr ne r mre f the fllwing reasns: When yu initiated yur VMI prgram yu said Let s start with the A items we ll pick up the B s and C s later. At the time, that made perfect sense fr bth yu and yur whlesalers. There were fewer f thse items and they were actually easier t manage. But even thugh that left the jb nly partially dne, yu may have never gtten arund t ging beynd A items. The prblems caused by B & C items dn t ften cause a crisis. Even thugh the prblems and lst pprtunities caused by pr management f B & C items are very real, they may nt stand ut n a day-t-day basis. 4

6 The cst f technlgy was high when yu started VMI. If yu initiated yur VMI prgram even 5-7 years ag, the cst f data transmissin was still high, making the business case fr managing B & C items less clear. Yu weren t sure yu culd handle such a large vlume f SKUs. Again, when yu initiated yur VMI prgram, the VMI system yu had t wrk with was prbably nt as well-refined as tday s slutins. Even with the help f yur system, it might nt have been practical t scale it up t 8 10 times as many items. Nw is the Time t Expand Yur VMI Prgram Nw is the time t expand yur VMI prgram t include B & C items. A number f things are different tday frm when yu started yur VMI prgram several years ag. A New Generatin f VMI Accrding t Andrew White, Supply Chain Analyst fr Gartner Grup, VMI has caught its secnd wind because the timing and technlgies are nw in place. White cites pervasive EDI, the drive t reduce inventry csts, and a variety f methds t evaluate and respnd t market needs as the driving frces The ld VMI is quickly being replaced by a mre interactive apprach that builds n the infrastructure and initiatives being pursued in the wrld f ecmmerce. ecmmerce Best Practices ( Yu can t affrd t ignre a prven pprtunity t grw sales. With a market that s mre cmpetitive than ever, it is imprtant t take any practical step yu can t leverage every sales pprtunity and grw market share VMI is a prven way t d that. Yu nw have experience with VMI. Yu re already experienced at managing A items with VMI, and yu can build n that experience. The cst f the technlgy is a fractin f what it nce was. With tls like Internet-based EDI and XML, the cst f capturing sales and inventry infrmatin n thusands f SKUs is nw negligible. And with prven slutins delivered using the Sftware as a Service (SaaS) apprach, yu n lnger need a large investment in hardware, sftware and IT persnnel. Tday s slutins can scale withut a big increase in peple resurces. Wrking with many cmpanies acrss many industries, VMI service prviders like Datalliance have been refining VMI slutins fr years mainly with an eye t cntinuusly imprving the prductivity f the peple charged with perating the system n a day-t-day basis. The number f SKUs and lcatins a given VMI planner can manage tday may be an rder f magnitude greater than the supprt system yu currently use. 5

7 Talk with Datalliance Datalliance is the leading independent prvider f VMI services and related cllabrative cmmerce slutins. We supprt many leading manufacturers and their whlesalers in industries such as electrical, plumbing and industrial; autmtive aftermarket parts, cnsumer gds, and mre. We can help yu lk clsely at the pprtunities yu culd pen by expanding yur VMI prgram t include yur B & C items. And we can shw yu many examples f cmpanies wh manage thusands f SKUs A, B & C items with small VMI teams using Datalliance. Fr mre infrmatin abut Datalliance and VMI, visit r cntact us at inf@datalliance.cm r