Companies that purchase fuels, chemicals, solvents and other products often have to make a choice: either reduce costs by keeping inventory levels low, risking run-outs and lost sales, or keep enough surplus inventories on hand to be prepared for unforeseen spikes in product demand, which tends to drive up inventory costs and market price risks.
F U E L I N G B E T T E R D E C I S I O N S
Vendor-Managed Inventory:
Using Trust, Information and Relationships
to Improve Operational Efficiency
John Lee, Chief Executive OfficerWorldTelemetry, Inc.
W H I T E P A P E R
Abstract Introduction
Companies that purchase fuels, chemicals, Innovative companies fail regularly. Why? solvents and other products often have to Often the people who create the best prod-make a choice: either reduce costs by keep- ucts have little idea of how to operate an ing inventory levels low, risking run-outs efficient business. Their companies struggle and lost sales, or keep enough surplus inven- through high- interest loans and demanding tories on hand to be prepared for unforeseen investors, then are often bought or go bank-spikes in product demand, which tends to rupt, their origins relegated to the footnotes drive up inventory costs and market price of business school textbooks. risks. Yet some survive. Some become global com-Vendor-managed inventory is a system by panies, and are seen as industry leaders who page which the distributor (seller) of products push convention. What enabled these com-1 (e.g. fuels) monitors and manages a custom- panies to not only survive, but to lead?er's (buyer's) inventory levels, oftenthrough a system of automated data collection and Financial Planning. Efficiency. Well-man-analysis. When product inventories drop aged operations. below a specified level, the distributor dispatches a delivery based on previously While the charismatic leaders of these com-agreed-upon criteria. panies may not get an adrenaline rush from By utilizing VMI, buyers are able to have reducing inventory lead-time from six weeks the inventory available as soon as the need to two, there are those within who do. These arises, without incurring the costs and risks are the process visionaries; they are the of keeping a large surplus on hand. Buyers people who pushed the assembly line, bar are assured of a reliable supply of product coding and electronic data interchange well while avoiding higher than necessary inven- before the internet boom.tories and the associated cost of capital. So what happened after the millennium, VMI fosters lasting relationships between when fuel prices began to skyrocket, becom-distributors and customers through the effec- ing a significant threat to profitability? Some tive use of technology. buyers strove to reduce costs by keeping F U E L I N G B E T T E R D E C I S I O N S
inventory levels low, risking run-outs and lost VMI blurs the barrier between companies by sales. Others chose to keep enough surplus extending the scope of each company's in-inventories on hand to be prepared for supply ventory management process. Rather than a disruptions or unforeseen spikes in product handoff of the order, there is an overlap. This demand, thereby increasing inventory costs overlap is comprised of a service level agree-and market price risks. ment and shared data.
A few operations pioneers, however, saw new The result is that buyer's role has gone from automated tank monitoring technology and low-level operations management to one fo-business intelligence software and found a bet- cused on performance monitoring and opera-ter solution: Vendor Managed Inventory. tional improvement.Extending The Boundaries How VMI Works With Fuel
Vendor Managed Inventory (VMI) is a system Inventory Managementby which the distributor (seller) of products (e.g. fuels) monitors and manages a custom- The basic principles of VMI work the same for er's (buyer's) inventory levels. When product fuel inventory as they do for discrete prod-inventories drop below a specified level, the ucts. However, storage issues, compliance, distributor dispatches a delivery to replen- safety, as well as the constantly varying price ish them based on previously agreed criteria of inventory all impact fuel replenishment in between the distributor and customer. ways that discrete goods industries seldom experience. In essence, VMI constitutes the transfer of an internal overhead process (fuel inventory man- For instance, the basic measuring process for fuels is different. There is no counting, bar page agement) to a company for whom this same 2 process is viewed as mission critical. The coding or scanning at the register. Someone, focus, the expertise, the capital that these sup- or som... [download for more]
