Wanted: Is VMI still MIA?

The MO of VMI

There are a variety of options for distributors and suppliers looking to implement a VMI solution. Here's how the process typically works:

• Suppliers use an outside provider, such as Datalliance, or their own in-house method to offer VMI to distributors. Suppliers pick up the cost of a VMI solution.
• Distributors work with the manufacturer, the VMI provider and their third-party software provider to determine mutually-agreed upon objectives and to set up parameters for data collection and reports.
• Sales, inventory position and other data (business system independent) are gathered from the distributor (per location), which the VMI software analyzes.
• The VMI application will recommend an order, which suppliers review on their own or with distributors to determine appropriate purchase orders.
• In many cases, the distributor turns all inventory responsibility over to the supplier once the system is established.

A well implemented VMI solution, Buchanan says, can lead to reduced inventory, increased turns and fewer out-of-stock situations for distributors. Last year, Datalliance conducted a performance study among a sample set of 156 location relationships spread out across 21 distributors and 10 suppliers (in all industries) before and after VMI. The data show suppliers enjoyed a 24 percent increase in sales at the average location, while distributors experienced a 25 percent increase in turns over the year and a 31 percent reduction in stock outs.

"We've cut inventory costs and increased sales since using VMI," says Brian Cantagallo, operations manager at AB&S Warehouse, an underbody parts distributor headquartered in New Jersey. AB&S began using VMI more than a year ago. "We have over 50 vendors we have to deal with, so when you have one vendor that's going to step up and take the cost out (of managing inventory) it's one less thing I have to worry about."

Using WHI's Nexpart AE Distribution Management system, AB&S works with Datalliance to allow its supplier, SKF, to manage inventory.

"We set up all the parameters, and now it is all done automatically. We do not place any orders except for special orders," he notes. AB&S formerly operated as a hub-and-spoke location, with all orders getting shipped to its main warehouse and distributed to each location. That's all changed with its SKF inventory, which the manufacturer manages and ships directly via UPS.

Cantagallo states that he doesn't have to stock everything at the main warehouse now, which means less inventory for AB&S to hold.

Craig Young, director of Information Systems at SKF, notes that the manufacturer currently manages the inventory of 15 customers, of which AB&S is one.

VMI, he explains, tends to stock broader lines of products, but not as deeply. For example, if a distributor carries eight weeks of inventory of the manufacturer's A items, VMI will advise it reduces inventory on the A items and stock additional B and C items.

"It increases sales for our customers because now they have the right product on hand," Young says. "Even doing that — carrying more products — it actually reduces the inventory dollars. I've been in this industry for a long time, and everybody talks about a win-win situation. VMI is actually the first and, so far, only application that has lived up to the hype."

He adds that customers send their inventory position on a daily basis to the Datalliance VMI application. VMI will analyze that and create a recommended order.

"In our market, our customers generally will order only once a week unless it's an emergency," he explains. "So on a weekly basis, our VMI administrators will go into the particular customer's order and review it before we 'launch' the order."

Page Brake Warehouse, a hard parts distributor with 10 retail distribution locations, began using VMI to manage its 60,000 active SKUs.

"We tend to migrate to those companies that are concerned about doing the best things for us as a distributor," notes Inventory Manager Craig Hansen. "Our inventory turns have increased and our stock outs have decreased. As far as new product offerings that a manufacturer has, we're able to respond to those more quickly and ensure they're on our shelf because of the data flow (that VMI offers)."

Good news for suppliers, too

It isn't only distributors who reap rewards from VMI systems. Although suppliers carry the costs of these solutions, VMI can have a positive effect on their businesses as well.

For example, because inventory management is taken out of distributors' hands, they can focus on more important job duties, like sales.

Buchanan at Datalliance thinks VMI is a wise investment for suppliers because it fosters a better relationship with trading partners. "For suppliers that begin a VMI relationship with distributors, they typically will enjoy increased sales in the region of 20 to 25 percent because the supplier is making it easier to do business with them," he says.

Young agrees that his sales have increased in some cases since using VMI. Why? Customers tend to stock his line more broadly. "The other benefit we see is it's really reduced the returns, which saves us a lot of time worrying about restocking," he notes. "It's greatly improved the relationship between us and the customers we have up on VMI."

Bosch uses an internal VMI-type process that allows for more open communication between the supplier and the customer. Right now, Bosch is working with three of its customers on some form of collaboration, says Kevin Tyschper, director, supply and demand planning at Robert Bosch LLC.

"We do not use traditional VMI per se with our customers," he says. "We rely on interaction with our customers' systems to assist in supply chain planning, and see a smoother relationship, enhanced market penetration and concerted sales strength as a result."

With its system, customers allow Bosch to dial into and have access to their data. Bosch uses a strategy that focuses on collaborative planning, forecasting and replenishment, which promotes weekly meetings between supply chain, sales and customer service, and the customers' product managers, Tyschper adds.

Opportunities and challenges

Buchanan says VMI models continuously are improving, with today's systems being less expensive and capable of handling unique situations like slower moving items or seasonal items and promotions better than in the past.

Datalliance offers a Software as a Service model, which means all upgrades are automatically put into the solution and customers don't have to upgrade or deal with hardware problems. Suppliers absorb an annual fee and a location fee (per location managed).

The company's software works in conjunction with a distributor's business system, Buchanan explains, to generate recommended replenishment orders.

"One of the challenges associated with VMI is the fact that there are lots of different business systems (or inventory management systems) in the community, and each of them tends to report slightly different data in their own unique way," he states. "Working with different data sources can be overwhelming for a supplier and often results in extended and sometimes abandoned VMI implementations."

Buchanan adds that Datalliance takes responsibility for mapping the various data formats into one standard database, resulting in easy-to-understand data for suppliers.

Though distributors may be concerned with a VMI solution interfering with their warehouse management or e-commerce solutions, most systems today can work together to the industry's advantage.

Bryan Murphy, president and CEO of WHI Solutions, says some industry members choose to use WHI's products in conjunction with their own. For instance, Virtual Inventory, an e-commerce solution WHI recently introduced, allows more than 60,000 parts buyers to search parts availability from warehouses, jobbers and now the inventory of a manufacturer's DC.

"Tying in the manufacturer, who has hundreds of thousands of SKUs in their distribution centers, has a huge impact on the sales of the distributor and jobber," Murphy explains.

Technology provider Activant Solutions Inc. currently is building components that will participate in a VMI framework, says Rod Bayless, product director.

"We haven't seen a lot of it happen yet in the traditional aftermarket," he says. "Distributors see themselves as key middlemen in the aftermarket, supporting a high level of service to the professional parts installer. Their role in the industry is placing the right inventory in the right place at the right time — not just replenishing it," meaning some are hesitant to hand over inventory practices to an outside service.

Other retailers like hardware stores and Wal-Mart are less leery, adds Bayless.

"Category management is big in our industry right now, and I think that will help VMI in the long run," Bayless offers. "It will help manufacturers and distributors sit down, look at data and actually make plans together. We need a better loop of communication over inventory. That's really the first step."

With today's technology and the common use of the Internet, distributors regularly capture point-of-sale data and manage their inventory levels with software solutions. However, Bayless says, some are hesitant to hand the role of ordering product over to manufacturers completely.

Although there appears to be a fear in the aftermarket of sharing personal business information with competitors, Hansen at Page Brake Warehouse says the "open-systems" approach has actually been positive for the distributor.

"As a distributor, you tend to wear multiple hats," he adds. "If anything, using this system just frees up time to do what we do best. It's been a very positive experience."