Explore how different inventory strategies impact your business and discover why VMI could be your winning solution
Managing a high volume of inventory is a job in itself. Understanding the peaks and troughs of production and being able to adapt to ensure parts are in stock without weighing the business down with large amounts of surplus inventory is complex.
Whether you’re a small retailer or a multinational manufacturer, how you handle inventory profoundly impacts your bottom line. In this blog post, we’ll highlight the various approaches to this supply chain problem – from innovative Vendor-Managed Inventory (VMI) to more traditional and alternative models.
Firstly, we should introduce the alternatives which we’re lining up against our VMI supply chain solutions. In this piece, we’re focusing on:
Traditional
- Reorder Point Formula
- Periodic Review
Alternatives
- Consignment Stock
From TFC’s vantage point, we see these as the most common alternatives with clients and prospects. If you’re reliant on a different approach and would like to understand how VMI could impact your operations – Request a call back from one of our VMI experts.
Traditional Inventory Procurement Methods
Reorder Point Formula
This works like a straightforward alarm system.
Working with your team on the floor, you identify the speed with which parts are being utilised per day. To identify your reorder point, you consider the typical turnaround time for your supplier to ship those parts to your facility, plus any time required to process the parts on your side. On top of that, it’s best to add a small margin to account for additional delays.
In the most basic sense, this should look something like:
- Your business uses Part X four times per day
- Your supplier typically takes five to seven working days to deliver Part X
- You need two days to check the quality and get it out on the floor properly.
- You should be setting your reorder point at around 44 parts remaining in your inventory – allowing an extra two days or so.
The simplicity of this method speaks for itself. It’s a perfectly manageable system, particularly for larger parts which are far more straightforward to quantify. It’s also pretty agile and allows you to maintain only a stock level that you’re comfortable with.
Why would you consider an alternative?
The simplicity of this solution starts to fall apart when working with smaller, high-volume parts, such as C-parts.
Expecting your teams to maintain the count on thousands of fasteners in a bin becomes unfeasible. This approach is only as robust as the workers maintaining it. Human error can mean that the count is lost or the ‘alarm’ isn’t acknowledged.
Alternatively, you stock conservatively and keep additional parts on site, which can impose issues on space in your plant.
Periodic Review
Another traditional approach. Rather than rely on the ‘alarm’ point of your inventory, you can build in regular periodic reviews of inventory.
This approach has the advantage of allowing your manufacturers and fabricators on the floor to use the product without keeping a count of stock. Then, at predetermined intervals, a full check of inventory can take place with procurement decisions made off the back of this audit.
Why would you consider an alternative?
This approach is predictable and routine but leaves a business open to mistiming audits and running out before the issue is caught. This might arise because changes in production haven’t been fed to the procurement team, meaning that part usage has increased without it being flagged.
It can also be an issue if the date is ignored, like the ‘alarms’ of reorder point replenishment. This can be the case in moments of tight turnaround and deadlines. Not to mention the laborious nature of completing regular full inventory checks, taking your team away from production.
Alternative Inventory Procurement Methods
Consignment Stock/Inventory
Consignment inventory is a supply chain model where a parts supplier (or consignor) places spare parts, tools, or finished goods at the client/manufacturer’s (consignee’s) site, whilst the original parts supplier retains ownership of the inventory until the client uses it or sells it.
Here’s how it works:
1. Ownership Retained: In consignment, the manufacturer maintains ownership until the product is either consumed in the manufacturing process or sold to an end consumer.
2. Payment Upon Consumption or Sale: The retailer (or user) doesn’t pay for the product upfront. Instead, payment occurs only when the product is used or sold. This arrangement reduces financial risk for the retailer.
Consignment inventory is used by many industries, often in businesses that are reliant on just-in-time production. Those who adopt it use it to reduce the amount of capital invested in inventory until it’s needed while building stronger relationships with suppliers and decreasing the risk of obsolescence.
Why would you consider an alternative?
Despite having access to your inventory without immediate investment, there are costs associated with this form of supply chain and inventory management. Consignment inventory can be administratively complex, as it requires meticulous tracking of inventory levels, ownership, and usage at the manufacturer’s site. Both the supplier and the customer need to maintain accurate records to ensure proper billing and inventory replenishment, which can increase the operational burden. This can cause severe issues to businesses looking to grow their production output with minimal increase in admin.
Vendor-Managed Inventory (VMI)
What is a VMI?
We go into more depth about our VMI supply chain offering on our website, but in short:
Vendor-Managed Inventory (VMI) is a supply chain management strategy where the supplier takes full responsibility for maintaining the buyer’s inventory levels. Instead of the buyer (typically a manufacturer or retailer) placing orders to replenish stock, the supplier monitors inventory levels at the buyer’s location and makes replenishment decisions based on pre-agreed criteria. This proactive approach allows for better alignment with actual demand, reduces the risk of stockouts or overstocking, and fosters closer collaboration between suppliers and buyers, ultimately leading to a more efficient and responsive supply chain.
This strategy is sometimes referred to as Supplier Managed Inventory (SMI). While some argue that there are some differences, both concepts aim to streamline inventory management, improve supply chain efficiency, and foster closer collaboration between the supplier and the buyer.
Opting for a VMI in your supply chain is beneficial for businesses that:
1. Experience frequent stock-outs – low stock levels aren’t recorded and orders aren’t being placed in time
2. Overstock or stock obsolete items – orders aren’t documented, resulting in multiple deliveries, surplus stock and obsolete items
3. Lack a centralised stock management system – staff are vigilant but information isn’t passed through departments or in shift handover
Why would you consider an alternative?
Naturally, it’s hard for us to speak without bias on the topic.
Smaller operations may find it difficult to justify a VMI service in their supply chain. Typically, we’ve found that low-volume manufacturing businesses struggle to justify working with a third party. Similarly, manufacturing businesses that have unpredictable production schedules i.e. those working on a bespoke project basis where it’s difficult to forecast your inventory requirements – also fail to fully benefit from a VMI service. The scope for VMI usage is broader than this short blog could clearly articulate, so it’s worth speaking to specialists to see if VMI could align with how you work best.
Why choose TFC’s VMI service?
We’re conscious that some people reading this will already be using a VMI service but are also not especially satisfied with it.
We’re not fad or trend-driven; we work with you to develop a VMI solution best suited to your business operations, and then we deliver on it. We pride ourselves on the quality of our sourced materials and the quality of customer service.
Our testimonies speak for themselves:
“Flexible cooperation with a strong focus to meet customer needs.”
“TFC is more a partner than a supplier due to their local team.”
“Overall, the package is outstanding. Excellent technical support and knowledgeable external sales are always available.”
If you think we could support your business better than current suppliers? Get in touch.
In conclusion, choosing the right inventory management strategy is crucial for any business, regardless of its size or industry. The traditional methods, like the Reorder Point Formula and Periodic Review, offer simplicity and familiarity but can fall short when dealing with complex, high-volume inventory. Consignment stock provides flexibility without immediate financial commitment but requires careful tracking and management.
On the other hand, Vendor-Managed Inventory (VMI) presents a more integrated approach, reducing the risks of stockouts and overstocking while enhancing supplier relationships.
For the right client, VMI offers many of the benefits of the aforementioned approaches to procurement. For example, the VMI supplier will hold pre-agreed reserve stocks of parts from the supply base, so replenishment can be a smooth process and peaks and troughs in demand can be accommodated. This is very close to consignment stock but without the legal and administrative burdens that come with managing that method. Parts are supplied as they’re needed, meaning cash tied up in supplied materials is kept to a minimum and optimal level.
Ultimately, the best approach depends on your specific operational needs, the scale of your business, and your capacity to manage the chosen inventory system effectively. By understanding these options, you can make informed decisions that optimise your supply chain, improve efficiency, and positively impact your bottom line.
Interested in further information on how to improve efficiency around procurement and supply chain management? We’ve written a detailed guide here.
