Vendor managed inventory

by Eric Allais
Eric Allais
Eric Allais

In recent years vendor managed inventory, or VMI, has grown as a way for manufacturers, big box retailers and others to better manage stock volumes while reducing their operating costs. Suppliers venturing into the VMI space are doing so both out of necessity and as a way to capture a greater share of the market as more and more manufacturers shift to this inventory model.

Two examples are Red-L Distributors, a hose, fitting and lubricant distributor, and EB Horsman & Son, an electrical distributor, both with locations in Alberta and British Columbia.

Both companies view their VMI services as significant value-adds to their already high levels of customer service. Having implemented VMI programs as part of their WMS rollouts in the last five years, these companies have enjoyed significant improvements in order speed, accuracy and customer service.

As the name suggests, VMI makes the supplier of the goods (often the manufacturer) responsible for optimizing the inventory ‘owned’ by a customer. To understand how this is done in practice, let’s take a look at the three most common forms of VMI deployment in use today.

Traditional VMI
In traditional VMI models, a salesperson visits the customer, takes inventory, fills out a form detailing what needs to be ordered, and emails or faxes their orders back to the home sales office, where a member of the inside sales team keys in the actual order. In some cases the customers themselves send in their orders.

Both are slow and prone to human error due to poor handwriting, incorrect part numbers or clerical mistakes made while entering the order. This traditional model was especially problematic for EB Horsman and Red-L, because many of their customers were located in remote areas. That meant increased travel time for their sales teams, which led to replenishment cycles that were often delayed by two or more days.

Robust warehouse management systems offer VMI modules that greatly streamline cumbersome paper-based processes. Using handheld devices, smart phones, or other technology, sales people (or the customers themselves) are able to re-order product simply by scanning a barcode. These orders are immediately relayed via email or digital network back to the WMS where the items and quantities are validated.

Other value adds like custom barcode labeling with the customer part number, description, pictures of the item, etc are commonly managed and printed by the WMS. The end result is faster and more accurate reordering of product with lower cost for the vendor.

“Training time for staff is minimal. If new VMI users are already comfortable interacting with their WMS then I only need to spend five minutes on the phone with them to bring them up to speed,”
–Sabina McNally, IT assistant and training coordinator at Red-L

Customer-managed VMI
More and more customers simply want the benefits of VMI without needing a visit from a salesperson. In these cases they want their vendors to supply the technology to re-order product quickly and easily. With this in mind, EB Horsman’s VMI “program” gives their customers the option of having an EB Horsman sales rep manage their inventory or the ability to manage it themselves.

In the latter case, the customers are responsible for the creation and transmission of their orders with an interim review step by EB Horsman staff to make any additions, corrections, etc., and then confirm the order. EB Horsman recently launched its first mobile warehouse using the VMI module to record on-site activity in a remote industrial setting.

“Cost control and recording costs at the billing level were very important to our customer,” said Roy Bragg, vice president of operations at EB Horsman. “The onsite trailer allows us to have over 100 items available on site and record and send inventory to multiple jobs within the site, which is reported or billed to those specific jobs. All product entry is done by the customer on site. In conjunction with our ERP, Min Max levels are used to capture replenishment for the stock which is then shipped to the trailer.”

Saving time, effort and money
Both the customer-managed VMI and the WMS-run VMI make replenishment much more efficient and save a huge amount of time. This is the largest benefit to customers and distributors by far.

“If you look at typical manufacturers, industrial customers, factories, or service centers, they usually have anywhere from one to two hundred items being used daily, weekly or monthly,” said Bragg. “To have these items on hand at all times reduces the workload for the customer’s floor staff and purchasing departments, gives them time to concentrate on high-value and critical inventory, and ensures that the jobs are done on time. Simply put, it eliminates all of the paperwork and procurement time spent on repetitive items.”

“As customers experience this freedom, they are adding items to their VMI lists and improving service levels to their customers,” continued Bragg. “In today’s market, customer service and timely delivery of goods is the edge that will produce repeat orders and help your company gain market share. Our goal is to be part of our customers’ success by extending our operational excellence and technical capabilities to them.”

“We immediately recognized the benefits of the system in time savings, accuracy and overall effectiveness,” added Sabina McNally, IT assistant and training coordinator at Red-L. “So we knew that we should move forward and invest in the technology.”

Since many of Red-L’s customers are maintenance shops, plants and factories located in remote areas, the sales team had difficulty making regular trips to check inventory; this led to longer wait times between replenishment cycles.

Since installing the VMI module in its WMS, those times have dropped dramatically. Salespeople now simply need to open the order on their handheld devices, scan the vendor’s merchandise and send the orders back to home base. The parts will be picked and sent out the door even before the salesperson makes it to their next customer site. Red-L estimates that its time spent on replenishment has decreased by 80 percent.

A well-run VMI program also reduces the workload for customers since they don’t have to spend time managing inventory. Red-L’s largest customer has twelve bins optimized specifically for VMI. The Red-L salesperson simply visits once a week, scans the bins, and the order is processed through standing purchase orders. The customers are confident the inventory they need will be there when they need it and no one wastes time worrying about order fulfilment. Costs are saved on both sides.

Are these VMI systems difficult to use? McNally doesn’t think so.

“Training time for staff is minimal. If new VMI users are already comfortable interacting with their WMS then I only need to spend five minutes on the phone with them to bring them up to speed,” she said.

The right order every time
As mentioned before, the traditional VMI model introduces a much higher likelihood of human error. Even with careful attention to detail, errors due to data entry mistakes and poor handwriting can and do happen. These mistakes can be costly to fix, and damage a hard-won reputation. Barcode labels and scanners eliminate many of these risks and make incorrect orders virtually nonexistent.

McNally concurred, saying, “It’s made huge improvements in our order accuracy.”

Getting in front of the customer
Finally, let’s look at how running VMI through a WMS can improve customer service.

“Our market is extremely competitive, and seeing someone on a regular basis keeps our business relationship strong,” McNally said. “Since customer service reps spend less time handling each individual replenishment order, they can visit their customers more often, advise them of new specials and ordering opportunities, and handle any of their problems or concerns on a more regular basis. Red-L’s customers are happy because the VMI system reduces their workloads. It’s a win-win situation for all concerned.”

If customers want to have greater control over inventory management, setting them up to fulfill orders is extremely simple. EB Horsman provides this capability to its customers directly to improve re-ordering efficiency.

“We were particularly impressed with the ability to customize our VMI to support VMI-via-email or WIFI using a mobile device, which dramatically simplifies deployment,” Bragg explained. “This can save on costs for us the distributor but more importantly the customer. We’re very proud to be one of the first electrical distributors to give our customers the service level that can be achieved using real-time inventory in a wholesale customer environment.”

The point is, VMI modules are highly customizable, so exact processes can be tweaked depending on the business practices at an individual warehouse and at customer sites. The program can be tailored to meet specific needs.

“We started using the VMI module about four years ago with 10 customers, and now I’d say we have about 40 using it on a regular basis,” said McNally. “We are able to stay on top of market trends in parts usage and are able to grow alongside our customers’ business as the relationship grows stronger.”

Bragg adds, “Cost control, order accuracy and warehouse efficiency are part of our core strategy, operational excellence, and always at the top of our hit list. VMI has and is helping us service many of our customers in various markets and geographic locations. It sets us up for success and market share gains—that’s priceless.”


Eric Allais, president and CEO of Washington-based PathGuide Technologies, Inc, has over 30 years of experience in marketing, product management and sector analysis in the automated data collection industry, including warehouse management practices in wholesale distribution.