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Evaluating The Financial Benefits of VMI. Part 2


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About 8% of the Fair Wide inventory is ‘spent’ on obsolescence. Applying 8% to half the supplier inventory represents a $40,000 price tag. The overall impact of better inventory management, driven by a devoted and attentive supplier- side planner, is dramatic. More reliable replenishment and better sensing of direct demand and produces a level of inventory efficiency and lets Fair Wide run leaner with increased confidence. Fair Wide can actually lower its obsolescence price tag dramatically by 75%. This produces a bottom- line reduction in losses from obsolescence of $30, 000.

Finally, good vendor management can result in a real reduction in on-hand inventory of 10% or more. In the case of Far Wide, they estimate an 11% reduction for the one- half of its $1 million inventory that is available for conversion to VMI, reducing total inventory by $33,000. This also reduces the warehouse footprint for supplier inventory. Far Wide allocates 100 SF of warehouse floor space per 100 stock items, with a carrying cost of $3.71 per SF. They can reallocate warehouse space and generate savings of over $11, 000 per year.

Establishing direct vendor access to the demand and signal results in more responsiveness and lower on-hand inventory. Products stream into place with continuous replenishment at the point of consumption. Transforming from a ‘push’ supply chain to a ‘pull’ approach reduces and streamlines order processing operations.

In the case of Far & Wide International, the financial benefits add up as follows:

Savings from reduction of stock- outs: $305, 000

Savings in order processing costs: $285, 000

Savings in costs of obsolescence: $30, 000

Savings in warehouse carrying costs: $11, 000

As you quantify the prospective financial impact of a VMI programme, consider the following:

  • Identify the percentage of a supplier's inventory that will be converted to VMI.

  • Determine an estimate for reduction in inventory due to VMI. Waer use 11%. Be sure to include the full business cost of stock- outs in your savings calculation.

  • Add up the costs of purchase order creation and change orders related to the percentage of inventory to be converted to VMI. Again, include all costs associated with processing. We use a savings rate estimate of 50%.

  • Make a determination of how much impact supplier management will have on your ability to run a leaner inventory while maintaining service levels. We start with an estimate of 75% savings in obsolescence costs.

For more information on how to implement a powerful and practical VMI methodology across a global network of suppliers, OEM's, distributors and others, learn about the easy- to- implement, web based solutions available from Waer Systems.

Waer Systems can assist in developing a vendor managed inventory and VMI software . Get in touch with Waer Systems for all of your VMI needs.


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