Inventory Management Concepts

Inventory management and supply chain management are the backbone of any business operations. With the development of technology and availability of process driven software applications, inventory management has undergone revolutionary changes. In the last decade or so we have seen adaptation of enhanced customer service concept on the part of the manufacturers agreeing to manage and hold inventories at their customers end and thereby effect Just In Time deliveries. Though this concept is the same in essence different industries have named the models differently. Manufacturing companies like computer manufacturing or mobile phone manufacturers call the model by name VMI – Vendor Managed Industry while Automobile industry uses the term JIT – Just In Time where as apparel industry calls such a model by name – ECR - Efficient consumer response. The basic underlying model of inventory management remains the same.

Let us take the example of DELL, which has manufacturing facilities all over the world. They follow a concept of Build to Order where in the manufacturing or assembly of laptop is done only when the customer places a firm order on the web and confirms payment. Dell buys parts and accessories from various vendors. DELL has taken the initiative to work with third party service providers to set up warehouses adjacent to their plants and manage the inventories on behalf of DELL’s suppliers. The 3PL - third party service provider receives the consignments and holds inventory of parts on behalf of Dell’s suppliers. The 3PL warehouse houses inventories of all of DELL’s suppliers, which might number to more than two hundred suppliers. When DELL receives a confirmed order for a Laptop, the system generates a Bill of material, which is downloaded at the 3PL, processed and materials are arranged in the cage as per assembly process and delivered to the manufacturing floor directly. At this point of transfer, the recognition of sale happens from the Vendor to Dell. Until then the supplier himself at his expense holds the inventory.

Let us look at the benefits of this model for both Dell as well as Its Suppliers:

1. With VMI model, Dell has reduced its inbound supply chain and thereby gets to reduce its logistics and inventory management costs considerably.
2. DELL gets to postpone owning inventory until at the time of actual consumption. Thereby with no inventories DELL has no need for working capital to be invested into holding inventories.
3. DELL does not have to set up inventory operations and employ teams for operations as well as management of inventory functions.

Supplier Benefits

1. Supplier gets to establish better relationship and collaboration with DELL with long-term business prospect.
2. By agreeing to hold inventories and effect JIT supplies at the door to DELL, supplier will be in a better position to bargain and get more business from DELL.
3. With VMI model, supplier gets an opportunity to engage in better value proposition with his customer DELL.
4. Supplier gets confirmed forecast for the entire year with commitments from DELL for the quantity off take.
5. VMI managed is managed by 3PL and supplier does not have to engage himself in having to set up and manage inventory operations at DELL’s premise.
6. 3PL Managed VMI holds inventories of all suppliers thereby charges each supplier on per pallet basis or per sq.ft basis. Supplier thereby gets to pay on transaction basis without having to marry fixed costs of inventory operations.

Today most of the Multi National companies have successfully managed to get their suppliers and 3PL service providers to setup VMI throughout their plants all over the world and this model has become the order of the day.