In the current competitive business environment, it is essential to utilize all the avenues available to you to increase profitability.
Logically, this can be accomplished in two ways: reduce costs or increase revenue. Most businesses set revenue targets for themselves every year, but in reality they should also be looking at reducing their costs, particularly variable costs, of which a large component is inventory.
Enter Vendor Managed Inventory (VMI). In the past, most manufacturers have housed and managed their own inventory. In order to keep up with production requirements, much inventory has to be pre-ordered, purchased and kept in stock to ensure availability when required. This practice hikes up storage as well as inventory management costs, which in turn decreases profits.
However, if all these costs were reduced by channeling the responsibilities of inventory management to suppliers, the effects on profits could be tremendous. With the implementation of Vendor Managed Inventory this can be made possible. Large volumes of inventory will no longer be required, as your vendors will replenish you as and when you require it. Further, administration and management costs will also be reduced.
These benefits are possible because the Vendor Managed Inventory system connects you with your vendors, eliminating the redundant management of the same inventory. Therefore, whenever you have a requirement for items, your vendor will be alerted and will then ship the item to you. Billing for inventories can also be done through the system, thus saving you administration costs.
Furthermore, you can make payments through an Electronic Funds Transfer through the bank directly into the account of your vendor. Of course, discount structures and payment terms must be pre-negotiated and agreed upon before this can be done. In fact, if you work seamlessly with your vendors, they can even improve on their inventory forecasts and ultimately shorten their fulfillment time for delivery.
In order to enhance the effectiveness of the vendor management inventory system further within the supply chain management process, integration of this system into the company’s sales planning and forecasting as well as finished product order fulfillment system should be implemented. This way, the benefits of the VMI system will not just be limited to inventory management, but extended to enhance other areas within the business in the quest to attain ultimate cost reduction and greater efficiency.
Ken Town is VP Research and Technology at Invendia, a leading provider of Vendor Managed Inventory (VMI) and Web-based Inventory solutions.
