A Different Approach to VMI

We’re all looking for ways to increase our productivity, but sometimes that means letting go of traditional thinking.  Vendor managed inventory (VMI) is one of those areas. VMI is well understood in the retail industry, but it applies to many other markets as well. In markets where the delivery quantities can easily be flexed, like bulk gasses for instance, there is an opportunity to improve profit by thinking about delivery dates differently. While we’ve all had it beaten into our heads that early or late deliveries are bad, they may in fact be good for the bottom line – as long as you don’t disrupt the customer. Here’s why.

One of the tenets of VMI is that the supplier monitors the customer’s consumption and determines when it is time to replenish the customer’s inventory. The target quantity and delivery date/time are usually determined by a combination of consumption and forecast data. Once the quantity and delivery time are set, they are seldom changed, but as most of us see in our businesses, changes occur. Instead of looking at this as a problem, it’s actually an opportunity if you can flex the delivery quantity and time. The key change in thinking is that the date and quantity are variable and can operate in a rolling period, as opposed to being fixed.

Let me give an example how this works. Let’s say you have your VMI deliveries optimally planned for next Wednesday and a new order comes in for delivery on Tuesday, right next door to the delivery that was planned for Wednesday. Wouldn’t you like to know if your profit could be greater if you delivered the Wednesday order on Tuesday even if you delivered a little less product than you might on Wednesday? The same goes for pushing the Wednesday order to a Thursday (or even Friday) delivery as long as the customer doesn’t run out of stock.

By taking a dynamic approach to delivery dates and quantities, the profit per delivery and resource utilization can increase significantly beyond traditional static delivery date VMI methods. Ferrell Gas, for example, uses the dynamic VMI approach and has been able to maximize the productivity of their delivery operations and maintain the highest gross profit per employee in their industry over the last 5 years. Another industrial gas company was able to increase their network productivity by 15% using this same concept.

Moving from a fixed delivery quantity and time to a flexible and rolling period approach for VMI is a great example of challenging traditional thinking and delivering significant results. How has your organization turned widely-held beliefs on their head for better performance? Let me know.