September 1, 2009

A well-run vendor-managed inventory (VMI) program could allow your business to speed up its cash flow by more closely matching your cash outlay for inventory with your cash inflows from sales and other income-generating activities. 

By tapping into the expertise of your vendors, your business may be able to:

• minimize inventory carrying costs (that is, cash tied up in inventory or costs associated with obtaining credit to fund inventory purchases) while
   
• maximizing sales (having the right inventory available at the right time for retail consumers or wholesale customers) and/or
   
• eliminating production or shipping downtime associated with longer-than-desired lead times for parts, supplies, and equipment.

Companies that offer VMI programs, such as OFFWIRE (distributor of wireless accessories to mobile phone retailers) and Universal Pallet Supply Inc. (shipping pallet and crate manufacturer) also promote these benefits to their customers:

• reduction in payroll expenses for staff who make purchasing and inventory management decisions;
   
• fewer errors in placing orders;
   
• reduction in expenses associated with distribution infrastructure for VMI programs that handle drop-shipments or direct-to-site shipments;
   
• smoother handling of logistical issues and lower transportation costs associated with better planning of inventory levels and product mix.

You can evaluate program effectiveness by establishing and monitoring performance prior to VMI implementation and after implementation on a regular basis. Indicators may include:

• inventory carrying costs
   
• inventory turnover
   
• service levels
   
• order fill rates
   
• write-offs of obsolescent inventory
   
• expenses associated with filling rush orders

The vendor may have measurement tools in place to demonstrate the value of the program and to assess its performance for the purpose of making continuous improvements. OFFWIRE offers a report card that measures two key metrics: attachment rate (accessories sold per unit sold); and profitability by attachment. Following the VMI implementation, the company reviews these metrics on a weekly basis and initiates calls to discuss any concerns. As a result, problems are quickly addressed and customers can see results in terms of increased sales and profitability.

If managing your inventory has been a costly burden or if you’d like to improve inventory performance and accelerate cash flow, ask your vendor about VMI programs.

Photo credit: iStockPhoto

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Julie Rains, Article, inventory, payroll, financial management