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