itsme Connected Business - Vendor Managed Inventory

When high-value attention to low-value inventory pays off

The Lean improvement method distinguishes eight waste categories. One of these is 'inventory'. Too much stock is not good, but neither is too little. After all, having stock also provides the safe feeling of availability in times of uncertain internal planning and external factors that cannot be directly influenced. Because optimising availability both in one's own company and in the supply chain is often not the core competence of our customers, itsme can take over the care of such optimisation, for example through the import and management of so-called Vendor Managed Inventory systems. But, how do you know whether VMI is indeed the right solution? Ralph van Aartsen can answer that crucial question - using five questions. Here, in advance, are his answers to our questions on VMI.

"As a consultant at itsme ConnectedBusiness, I visit customers and help them increase production and reduce costs and risks by improving procurement and inventory processes. For the timely availability of required products, our customers depend on the entire supply chain. If there is a hitch somewhere in one of our customers' suppliers, it can have major consequences. That is why it is very important to organise our business together in the best possible way: hence the name itsme ConnectedBusiness. We always look at which steps in the process we can possibly automate, but - perhaps more importantly - often there are also steps we can eliminate. And we especially look at the workload in the process because in many cases up to 70% of that workload relates to low-value items such as cable ties, ferrules, bolts, nuts, screws and things like that. The procurement process for those items is as expensive as that for high-value items, and so is the cost of not having them available on time. If they are not there, even cheap items can grow into big costs. Not on invoice, but very expensive. That's when we work with our customers to devise a new process for the availability of those items. In doing so, we look at the entire supply chain, including procurement and inventory, where a VMI solution is an option.

We then usually do that in the form of 2BIN, i.e. a two-bin system, where we put stock of the same item in two different bins. When the first bin is empty, it is placed in a separate rack, so it is clear that it needs to be reordered."

The five questions

"All our consultants have completed Lean Six Sigma training; it is a requirement for that position. In practice, we complement that knowledge with an approach based on our own MakingYouSucceed strategy. First, we want to understand with our client whether there is a real challenge in terms of product availability. That challenge can be a problem or a goal. If the customer does indeed have a problem or a goal, we always ask five questions: 1. How do you measure it? 2. What is it now? 3. What do you want it to be? 4. What is the value of the difference? 5. What is the time period of a solution? In this way, together with clients, we arrive at an objective quantification of the problem or goal. We try to express this in a euro value, justifying costs for its solution. Of course, it is not often that companies have exact answers to these questions. That's not a bad thing, that's what makes it interesting. Then, together with our client, we go through the business processes and map all direct and indirect costs. Measuring is knowing. And because insight is also mandatory, we then look at what we can do to solve the problems and achieve goals."

"VMI is not always a good idea"

"VMI is not always a good idea, but it is a good idea if you spend much of your time trying to keep enough stock of relatively low-value items. That's a waste. If you'd rather occupy yourself with more important things than taking care of the stuff that should just be there, VMI is a good idea. Then you have the assurance that it is just there. You don't have to look after it anymore, because itsme takes care of it. That is the most important thing about VMI." 

Is VMI suitable for every company with a warehouse? Or does its usefulness depend on the size of the company and its inventory? 

"It is basically suitable any company that has a production for which products are bought and stocked. A distinction is often made between project needs and general needs. Our VMI solutions are so flexible and quickly adaptable that they can be used for both types of needs. Consumption for project needs does, of course, keep track of our customers themselves.

As mentioned, the benefits of a VMI system can lie in reducing uncertainty in the supply chain, optimal production planning without bottlenecks and reducing costs by removing activities that do not add value to our customers' core processes. If these factors do not play a role, VMI is not interesting. Of course, it becomes more interesting as the security we can offer covers a wider required product range. Therefore, with our combination of electrical and mechanical products, we can offer interesting solutions for many customers. Our job is to practically and openly identify the costs and benefits together with our customer."

Does VMI only work with low-grade material? 

"VMI is possible for all types of needs for all types of material. For instance, we also have customers with complete control cabinets in their VMI. Depending on the analysis, costs and benefits and specific customer requirements, we design the VMI solution that integrates seamlessly into customer processes. After all, we want to be a reliable and invisible logistics 'plug-in' into those processes so that the customer does not have to worry about it. The cost of the 'plug-in' depends on the desired service level, ranging from entry-level to fully customer-specific. 

"We always start from our own strengths. We keep it simple and meaningful."

Do you still often notice that many companies misjudge that low-value material and think there is little profit to be made from it? 

"Yes, we still notice that a lot. There are really still a lot of companies that just spend a lot of time and energy acquiring and buying and stocking those kinds of goods. In doing so, they ignore another important advantage of a VMI: you basically don't have to write off your stock the moment you use it. The people who use the items can grab them without any hassle. Also, processing write-offs takes a lot of time and therefore money. If you no longer have to do that, the savings become much bigger."

The biggest challenge

"The biggest challenge in implementing a VMI is determining the right article database. If we are going to manage the right quantities of the right items for and with a customer, we first need to know what he has now and what he needs. Well, I quite often come across companies that do not keep track of their stock in an IT system. Those then have a whole warehouse full of stuff, but don't know what items they are or how much of it is lying around. Everything is just lying there, sometimes even in what we call 'pyramid-shaped storage': everything stacked on top of each other and thrown into the corner. To get some insight into that first, we offer another service, the Spare Part Optimisation Service. With this, we map out for customers how many of which items are in the warehouse, including the locations. Then we will assess what the consumption of these items is and whether it might be better to start a VMI with those items. Many customers are happy that we use our specialised knowledge of products and logistics to put their warehouse in order and offer insight into consumption costs."

Does VMI by itsme distinguish itself from VMI by other companies?

"We always start from our own strengths. We keep it simple and meaningful. And as mentioned, we generally talk about low-value inventory. In addition, I often hear from customers that the insight based on our reports on consumption in VMI and outside VMI is really considered very important. For all customers with VMI systems, we continue to analyse based on these reports. So we also provide regular advice on the whole picture, so not just VMI, but also the regular order flow, and keep in close contact with short lines of communication and honest, clear advice on adding, removing and adjusting stocks. These are things that really set us apart." 

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