Vendor-Managed Inventory and Auto-Replenishment

Implementing vendor managed inventory or auto-replenishment programs can help buyers streamline processes and save money

By Bridget McCrea

Image of Vendor-Managed Inventory and Auto-ReplenishmentAs companies strive to work smarter and more efficiently, an increasing number of them are looking to their suppliers to provide vendor-managed inventory (VMI) and auto-replenishment programs that give purchasing organizations peace of mind while also freeing the latter up to focus on more important tasks.

Suppliers that offer VMI programs, for example, gain access to their customers’ inventory data and are responsible for keeping that inventory at desired levels. The process can be used for parts, supplies, maintenance and repair, and various other items and responsibilities. Auto-replenishment works in a similar fashion but focuses primarily on automatic purchase order creation and auto-delivery of products directly to a plant, warehouse or retail store.

Two-way streets

In terms of the benefits they provide, auto-replenishment programs and VMI are both two-way streets, according to W. Bart Trebnick, Digi-Key Corporation’s director of Supply Chain Solutions. Suppliers gain access to a steady stream of orders and/or work while procurement agents get the benefit of reduced total cost of ownership, improved service levels, lower stock-outs, reduced warehouse or plant floor space, and less incidences of obsolete inventory. For buyers, there are also fewer purchase orders to cut and fewer calls from plant operators wondering why their critical parts are out of stock.

Trebnick says auto-replenishment and VMI programs work particularly well when the suppliers themselves carry ample inventory. “When you know that your vendor has the inventory on hand,” explains Trebnick, “then options like auto-replenishment become strategic advantages for the electronics buyer, who knows that he or she can rely on the repetitive buying program to work as planned.”

Image of W. Bart Trebnick, Digi-Key Corporation’s director of Supply Chain Solutions
“In terms of the benefits they provide, auto-replenishment programs and VMI are both two-way streets, according to W. Bart Trebnick, Digi-Key Corporation’s director of Supply Chain Solutions.
To kick off these types of programs, Trebnick says buyers should focus on the 80 percent of annual spend that is allocated to the company’s top 5-10 percent of parts. “That’s where companies will see the biggest cost reductions from VMI and/or auto-replenishment programs,” says Trebnick, who finds most electronics buyers open to the proposition of confidently offloading that aspect of their purchasing operations to a reliable supplier.

Ensuring the best possible relationship means finding a supplier that can operate well in the extremely dynamic electronics contract manufacturing environment – where companies, parts, assemblies, part numbers and processes change constantly. “Make sure the supplier you’re working with knows how to stay on top of these changes,” says Trebnick, “and can supply the right mix of parts, service and support on an ongoing, reliable basis. Without these elements in place, the relationship won’t produce the desired results.”

Looking for results

According to Trebnick, VMI and auto-replenishment options tend to produce the best results and most significant cost savings when the customer’s supply chain acts as a “continuation” of the supplier’s supply chain. Inventory visibility, for example, must be extended to the VMI provider in order for the arrangement to be win-win for all parties involved. “The supplier must be able to look at the historical span of transactions,” says Trebnick, “and accurately predict needs, prepare for the future and make recommendations.”

In many instances, Trebnick says those “recommendations” can help procurement professionals do their jobs in a more efficient manner while freeing up time that can be used for more important projects. “It’s a continuous feedback loop between the supplier and the customer,” says Trebnick, whose team frequently assesses the progress of its VMI and auto-replenishment programs, determines whether new programs or parts should be added, and works with customers to come up with individualized solutions.

“When you set up the right arrangement with the right supplier(s),” says Trebnick, “you wind up streamlining your entire procurement process and focusing on the more important, high-value moving parts versus the less frequently procured parts. That quickly turns into a cost-savings proposition for companies.”

The Many Variations of VMI

According to InventoryOps, the term “vendor-managed inventory” (VMI) covers a wide range of tasks related to managing inventory. A specific VMI program may cover a single task, all tasks, or any combination of tasks. Here are some examples:

Vendor shows up at customer’s facility, physically reviews inventory levels, immediately replenishes with inventory that is actually physically stocked on the customer’s shelves.

Vendor shows up at customer’s facility, physically reviews inventory levels, places an order for replenishment inventory that will be delivered at a later date. Depending on delivery method, the vendor may do the physical restocking, or may leave it for the customer to do.

Customer periodically (daily, weekly, etc.) provides vendor with current inventory levels. Vendor reviews inventory levels and creates replenishment orders. Replenishment orders are shipped to customer. Customer performs all physical tasks related to the inventory at his facility.

Vendor has direct access to customer’s inventory system and can get real-time information related to on-hand levels, open orders, forecasts, production schedules, etc. Vendor makes replenishment decisions based on this data and ships orders to customer.

Vendor provides an on-site inventory planner that works full-time at the customer’s facility managing the inventory supplied by that vendor.

Vendor leases space within the customer’s facility and runs its own warehouse and inventory planning operation with its employees from within the customer’s facility.

Disclaimer: The opinions, beliefs, and viewpoints expressed by the various authors and/or forum participants on this website do not necessarily reflect the opinions, beliefs, and viewpoints of Digi-Key Electronics or official policies of Digi-Key Electronics.