materials, including tooling, MRO and hazmat.
A 2004 study by Data Enterprise Management showed that surveyed companies with at least two years of automated VMI use had a 25 percent average increase in inventory turns, and a 31 percent average reduction in stock outs. Data Enterprise Management is part of Datalliance, which sets up software to manage VMI data flow.
“You have to give your customers real value,” says Bill Kiefer, manager of the industrial products division at Fuchs Machinery, Omaha, NE. “All the value is lost if you can’t show customers true savings.”
Safety Today’s Micheles says his customers have seen an average of 35 percent reduction in cost. Cost reductions can be traced mostly to less abuse or overuse of items. For example, employees might have changed gloves after every break, Micheles says. But now that every transaction is recorded, employees are more careful.
Other benefits to customers include:
- Reduced tool usage. Wherever Fuchs has put in automated dispensing units, its customers have seen a 15-percent to 25-percent cost savings, Kiefer says.
- Reduced walk-around time. Pixley says automated dispensing units can take the walk to get a new tool down from 15 minutes to 4 minutes, on average, resulting in an increase in productivity.
- Controlled second- and third-shift usage. Often, the toolcrib is manned during the first shift, but is open the second and third, leading to overuse or abuse of tools and other supplies.
- Reduced receiving/carrying costs.
- Reduced purchase orders. Pixley says his customers have seen up to an 80 percent reduction in purchase orders.
- Reduced shipping and expediting fees. Using VMI, customers are less likely to have out-of-stock items.
Data collection benefits both the customer and distributor. One of the largest benefits to distributors, Pixley says, is that once you implement this system for a customer, it’s harder for that customer to walk away from the account. It is also an added-value tool distributors can offer to gain new accounts, Pixley says.
“If it works well, it does wonders for customer relationships,” says Safety Today’s Micheles. But if there are glitches with the technology, “that is always trying.” Overall, though, Micheles says VMI and automated dispensing units have worked well for Safety Today and its customers.
Regardless of the tools used, the end game for customers is to lower the total cost of ownership. Increasingly, MRO and indirect spend are areas where customers realize they can see a return on the investment they put into buying and managing better. “For a long time customers focused on direct material costs and have wrung about as much as you can out of them,” says Ned Meyer, vice president of Xtivity Inc., London, Ontario. “Now they are looking at the indirect spend and how to reduce those costs.” The mistake many customers make, Meyer notes, is to shove the ownership costs onto suppliers. “That just results in added cost in another form. The key is to do a better job getting a handle on what demand really is at the point of use.”
That’s where his company found a sweet spot – or sore spot – where they could provide a substantial ROI for customers trying to manage large MRO inventories. Xtivity develops inventory optimization software that identifies, quantifies, reports and optimizes a customer’s data. The software optimizes order points and quantities on close to a real-time basis for both fast-moving and infrequent buys. The company often sees savings of up to 10 percent of total inventory value that can be driven to the bottom line by using these more sophisticated tools. “Typically the analytics on the customer’s side don’t exist,” Meyer says of most business management information systems. “They can’t keep up with the order levels and fluctuations. We’re able to provide a much more precise way to buy and then manage MRO inventories smarter.”
MRO purchasing and inventory management has come a long way in a fairly short time. With large organizations increasingly taking a more strategic view of how to manage their MRO buy, the combination of better knowledge, technology and practical delivery systems is creating some new opportunities for distributors.
Vendor-Managed Inventory systems are gaining ground, as point-of-use automated dispensing machines offer more options (affordably) for mid-sized and large manufacturing customers. Distributors are finding new opportunities with VMI as larger customers explore ways to get leaner and smarter about indirect material management.
Vendor-Managed Inventory has long been a specialized tool with strong benefits in the right environment. A distributor assumes management of a customer’s onsite inventory; the customer saves on internal labor costs as well as more effective control and resulting cost savings as the distributor brings its core competencies to bear.
While the core concept hasn’t changed significantly, more sophisticated software and computer systems have torqued VMI’s applications and horsepower in recent years. With automated VMI, distributors have lights-out” access to current inventory levels at each dispensing point. Distributors gain more accurate forecast and sales order information than manual systems; inventory management and replenishment is streamlined. If done correctly, the systems can boost distributors’ customer service levels while reducing labor costs and be a powerful differentiator to secure new business or deepen existing relationships.
At the Beginning
One of the pioneers of automated VMI was Steve Pixley, now owner and president of Autocrib Inc. In the mid-1990s, Pixley was responding to increased competition on the West Coast from large distributors that were setting up manual Vendor-Managed Inventory programs for customers. Distributors manned and stocked the toolcribs inside their customers’ plants, usually with consigned inventory, moving the management function from the customer to the distributor.
Pixley’s company at that time, Machine Tools Supply, Costa Mesa, CA, couldn’t afford to compete as a small distributor because of the added costs of the consigned inventory. Pixley says he couldn’t see the benefits of implementing VMI in that way unless there were cost savings and improved business processes involved for both the customer and the distributor.
He and a couple of business partners set to building a vending machine for tools. In Pixley’s mind, it would be an easier and more cost-effective way to implement VMI and control inventory more effectively by using software to control access to materials placed in the machines. “If you don’t put your name and department in the machine, you don’t get the product,” he says.
When he and his partners were ready to share their idea with the world, it turned out that two other companies were ready, as well. But Pixley never imagined the idea would take off like it has. In 1999, he spun AutoCrib off into its own business.
Automated VMI Primer
Two of the most common ways to implement automated VMI are through automated dispensing units and on-site inventory management via automated toolcribs manned and stocked by the distributor. Automated dispensing units can be used exclusively or in conjunction with a traditional toolcrib.
Automated dispensing units are effective in a large facility, where they can be placed strategically to cut down on walk-around time by employees. The machines can dispense everything from cutting tools and drill bits to gloves, hard hats and safety glasses. They range from the standard “soda-and-chips” type to machines with multi-sized trays or compartments that resemble lockers. Newer machines can even be configured to dispense oxygen bottles and welding tanks.
From the customer’s standpoint, loss control is significantly enhanced. Beyond that, bean counters gain a much better ability to track costs to specific jobs. When an employee requests an item from a unit, there are many options for data capture, including employee name/number, department, workstation, job and batch data.
Many distributors combine VMI with consigned inventory. Pixley says about 80 percent of the machines sold by Autocrib are used for consigned inventory. But while consigned inventory programs are often paired with VMI, there is a distinct and critical difference as to ownership and point of sale. Consignment can often tilt in favor of the customer unless the distributor gains from more business from the deal. With consigned inventory, a vendor continues to own the product at the customer’s location until a worker physically takes possession of the material. While the customer frees up material possession costs, the distributor has to manage the resulting deferred cash flow and potential risk associated with remotely located inventory.
“Consignment is much more a financial decision than anything else,” says Carl Hall, president and CEO of Datalliance, which configures software to manage VMI programs. Hall was part of the IBM-Procter & Gamble team that helped create the original VMI program between Procter & Gamble and Wal-Mart in the late 1980s.
VMI Cost Structures
Safety supplies distributor Safety Today, Columbus, OH, introduced vending machines to its customers about three years ago. It also offers on-site inventory management, which it has been doing for the past 10.
“Vending machines seem to be the most efficient way of dispersing product and the most cost-effective,” says Mark Micheles, Safety Today’s vice president of national accounts. Safety Today offers on-site safety stores, manned by a Safety Today employee who also provides safety services, such as fit testing and eye-wash station surveys.
Vending machines and the computer systems used to capture and send data can average more than $15,000 each. Larger manufacturing customers tend to buy the units; smaller ones tend to lease, either through their distributor or direct from the source. Like any leasing situation, upfront costs are reduced along with maintenance responsibility.
There are a range of replenishment options, including third-party services. If theft has been an issue inside a plant, a customer typically will seek to outsource those functions. Depending on the specific circumstances, it may be more effective for a distributor to outsource that function as well. Standard vending machine operators can fill this role. When they come to fill up the soda and chip machines, for example, they can stock drill bits and gloves as well. In this scenario the distributor communicates and delivers inventory to the operators. This can cost customers $75-$80 per fill per machine. A drawback to this, Micheles says, is that the operator may not be familiar with the inventory. So if something is mislabeled, mistakes in stocking could occur.
Automated VMI typically offers the best payback in efficiencies when a large number of SKUs are flowing through the system. Consider not just the cost of the machines, but also the software, hardware and personnel required for ongoing replenishment and other functions. Special packaging or re-packaging may be required for specific items. The first step for a distributor is to do a complete cost analysis, both with the customer as well as internally.
Bottom Line Benefits
While the cost of implementing these systems may seem high at first, customers may see some dramatic ongoing cost savings. Much of the growth of automated VMI has been driven by increasing focus on the implementation of lean practices, says Robert Holmes, marketing director for WinWare Inc., which owns Cribmaster Inventory Management System software. The automated processes can help customers who want to apply their lean focus to indirect