VMI – The Implementation

The second article will provide a short, first, summary of the implementation of VMI. How are suppliers approached and selected? What are suitable articles? These questions are on everyone’s mind when it comes to VMI. Suppliers are worried about the inventory risk while customers want to assure availability. The supply chain teams have to identify suitable articles to be used and need to define an implementation plan. Contracts need to be set up and approved. Also, collaboration processes are to be put in place. Inventory levels have to be defined as well. And KPIs have to be set-up on both ends. Once all this is taken care of, the warehouse management system has to be able to handle VMI and consignment stocks.

It is obvious that the VMI initiatives, while having huge potential benefits, are not to be taken lightly. Writing this post, it became pretty clear that one post is not enough to cover all of these points. So let’s get to article and supplier selection first!

How are Suppliers selected?

Having spend the majority of my career on the customer side, I am going to concentrate on how customers can approach these initiatives. As mentioned above, the first step is not critical so.

Supplier selection is tricky, traditional supplier evaluation metrics are ill-suited for this purpose. Bad supplier performance might even indicate suitable suppliers. VMI provides a large degree of flexibility for the supplier, bad delivery performance can indicate suppliers struggling with order sizes and predetermined delivery dates. How to distinguish between genuinely under performing supplier from suitable VMI candidates? By deep-diving on the root-causes for late or incomplete deliveries. Operational procurement is key in that analysis, they are at the frontline everyday and have already a rather good understanding of these issues. Also, talk to the supplier about these issues, often and early without thinking about VMI at all. Keep the discussion open ended. And once VMI is seriously considered come back to these discussions and results. And yes, also consider the best performing suppliers.

Once your potential suppliers are identified, a pilot supplier has to be picked (in case it is not the first supplier, a different set of prioritization criteria applies which will be covered in a different post). This identification is driven by the articles in question.

How are Articles selected?

VMI is based on forecasts, inaccurate forecasts are a major problem. So, suitable VMI articles are showing a high forecast accuracy. Alternatively, a stable consumption can be enough. Articles also have to contribute a significant portion of overall inventory levels, in short if inventories are not reduced in a meaningful way why bother with VMI? On your ABC-XYZ matrix, VMI candidates are most commonly found in the AB-XY categories. C-articles are better managed under KANBAN and X-articles are better kept in stock and managed individually until they turned into Y-articles. Should the biggest inventory contributors be addressed first? Not necessarily. The goal of any VMI pilot with a particular supplier is long-term success. Easy success is the better for the pilot phase than a huge impact that is hard to achieve. Operational procurement is again a key stake holder during this analysis. Also, a thorough analysis of potential VMI articles provides a first road map of follow-up articles.

How are suppliers approached?

Potential VMI suppliers show a willingness to work closely with customers. As stated above, this does not necessarily show in performance KPIs, but it certainly does show in the day to day business. It the willingness to remedy delay and defects, in response times and the openness of the communication. Is the supplier open about how important the customer is volume-wise? If the answer is yes, that is already a good indicator.

While operational procurement was the main driver if not behind the VMI initiative but behind the analysis, strategic procurement is owning the supplier approach. Personally, I prefer the direct and open way of approaching suppliers. VMI depends on a close partnership, being open early on sets the correct expectations going forward. I will keep internal stakeholder management for later, so let’s assume the customer is speaking with one voice.

What is this voice telling the supplier? The need to reduce inventories across the supply chain, the need to work together in that regard. And the benefits of consigned VMI for both parties. My personal experience is that a lot of suppliers are willing to listen and even willing to implement VMI. Chances are anyway that they are already using it with other customers. One big step in building the trust needed is to include the supplier in the article selection. Come prepared with a list of articles you, as a customer, would love to consider but take supplier input seriously. You might not know your suppliers problems with his portfolio, listening to your suppliers not only sharpens the article road-map and gives you a lot of insight into his way of working but also shows a level of trust your supplier might not have expected.

Also, be open about any past performance issues. Discuss them openly and in depth. And focus not on those issues that impaired performance in the past but focus on any issues that might impair performance in the future.

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