One-Stop Solution to High Inventory-Costs

Inventory management is one of the most crucial aspects for an organization. On one hand, high inventory increases the carrying cost for an organization, and on the other hand, low inventory leads to poor service levels and high shortage costs. Therefore, it is extremely important for each and every indifidual organization to maintain a balance between the two, to maximize benefit while minimizing risk.

Vendor Managed Inventory (VMI)

Organizations these days are adopting all possible ways to reduce inventory cost. Below are few such cost-savings implementations that can be easily employed by any organization.

Obviously, every business that produces tangible items needs material, which it buys from vendors, to make its product. To ensure continuous running of their production line they need to take care of various factors like safety stock of parts, lead-time, and minimum order quantity.

All such parameters lead to accumulation of parts in addition to the required bare essential. Thereby trapping and disrupting the cash flow of the organization. The solution to such problems lies in Vendor Managed Inventory.

VMI can be implemented for all the local vendors of an organization. Thus, the vendor manages the inventory of the parts bought by the organization. The no. of inventory-handling days on the part of the vendor depends upon the type of parts, value of parts, distance of vendor-location from the organization and manufacturing lead-time of parts.

Low-Value, High-Volume Parts

The low-value, high-volume parts similar to C-class items beget equivalent cost of administration alike high value items. The C-class items calls for greater precision in tracking and superior storage systems. Due to the lower cost of such parts, the manufacturers mandate a minimum order quantity.

Organizations usually end up maintaining surplus of such low-value, high-volume parts in order to avoid any risk of shortage. With higher inventory-carrying costs, these low value items hence need to be part of VMI.

Another factor to be considered, as discussed earlier is the organization-vendor distance. If a vendor is located near-at-hand from the organization and the manufacturing lead-time of the part is few hours, then it is feasible for the vendor to carry the inventory for 3-5 days.

Even for parts with similar lead-time if vendor’s site is situated far-off from organization, he will hold the inventory for 15-20 days. This will be inclusive of the logistic time and for any contingencies during transit.

On the contrary, for parts with higher manufacturing lead-time, the inventory handling days can be computed by adding the manufacturing lead-time and safety stock accordingly.

The VMI notion enables the organization to run their production line smoothly and keep their cash flows intact. It also saves them of the space required for storing the material. Organizations can look forward to increase their production with the available free storage space.

Vendor managed inventory as a concept not only empowers suppliers but also buyers, by allowing them to focus on production. VMI is therefore one-stop solution to all the problems of organizations who seek to expand production given the restriction of space and resources at their disposal.


*Image courtesy Flickr creative commons.

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