Which is better between Vendor Managed Inventory (VMI managed) and Consignment Inventory (CI)? That’s the question most supply chain managers are currently asking as companies push themselves to do more with less resources.
With CI, your inventory costs are in the hands of the supplier so the inventory costs are lower for you. In other words, you can buy items from suppliers but don’t have to pay the supplier until the items have been used, though you have to manage these items as your inventory. In VMI, you’re essentially paying someone to come in and manage the inventory for you.
So, which is the better option?
Well, there is no clear winner. Each scenario, if implemented correctly can be invaluable to any business.
Companies typically use a VMI supplier for Maintenance, Repair and Operating (MRO) items in their business activities. Usually, this includes all the indirect purchases and material that support manufacturing processes, including oil, grease, hammers, cutters, and drills among others. Companies are too busy managing direct spend that they would prefer not to spend time managing MRO and other indirect purchases. By letting the supplier handle inventory for items such as hammers which only support manufacturing, you can create more time for more value adding activities such as managing direct material and building products. Moreover, if you can find a supplier who is a specialist at VMI, they will likely do it better, faster and at a lower cost than you could, which would lead to cost savings.
(Learn more about NeoGrid’s VMI Solutions and how we can help you optimize your order and logistics processes.)
CI, at a glance, appears even more enticing because you can buy products from a supplier but don’t have to pay for those products until you use them. So, if you have inventory of something in your factory, you won’t be required to pay for it until the day when you finally use it. If the inventory sits there for a whole month, the supplier will only receive a check after that one month. It is a great deal, yes, but typically, you need a lot of leverage to pull off such kinds of deals. One way of getting such leverage is from indirect and MRO purchases.
If possible, use both. Of course, you’ll need to be a cash-flow superstar to pull off such a deal. But if the supplier is sure of steady long-term business from you, they might be open to such an arrangement.