Vendor Managed Inventory vs. Less Inventory

Almost every shop I have visited has, or is thinking about, initiating a “vendor managed inventory” program of some kind.

The pressure to do this is especially strong when there is a big push to improve working capital positions and increase inventory turns. And, to be honest, the way traditional accounting counts inventory turns, getting the inventory “off the books” is certainly one way to do it.

It follows, then, that vendor managed inventory can improve inventory turns, at least on paper.

In reality, though, unless the inventory itself is actually removed from the value stream, all that has happened is the valuation has been slid from one ledger to another. All of the costs are still in the system, they are just in different columns now.

It is the physical presence of inventory, not who owns it, that is evidence of some kind of problem. So “reducing” inventory by transferring ownership really doesn’t change the system at all.

The “documented cost savings” are often only an “on paper” artifact of traditional cost accounting, when the actual cash outlay of the organization doesn’t really change very much.

Then there is the added cost (often hidden) of managing distribution from a consignment stock, a tendency for supplier’s representatives to “sell” by stuffing bins as full as possible, and a host of other little things that can add up.

Don’t get me wrong, vendor managed inventory can, in theory, be done superbly and truly help. The problem is that it usually isn’t, and doesn’t.

Don’t push your problems onto your suppliers.
Solve them instead.

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