It’s every warehouse distributors’ goal: Have the right part in the right place at the right time. Sold, of course, at the right price.
Achieving that goal requires balance between inventory and demand. It’s the foundation for customer satisfaction and profitability, and it requires considerable supply channel communication and logistical complexity.
Technology has played a pivotal role in the evolution of inventory management. Gone are the days of tracking product and determining reorders by shuffling through a bin of index cards. But equally important has been a shift in the philosophy behind inventory management.
At one time, “there was comfort in walking through the warehouse and seeing those pallet racks loaded to the ceiling,” said Jay Pagano, VIPAR Heavy Duty director of business development. “Today, one can walk through that warehouse and having those pallet racks loaded to the ceiling doesn’t mean the same thing. That asset is now a liability. It’s just a cost staring at you.”
For most distributors, inventory is their second biggest investment, next to the warehouse space itself. Knowing when that asset becomes a financial liability is critical.
“There was a time in the 1970s and 80s when you could have huge inventories and always have everything in stock and still make money,” said John Flad, Bendix Commercial Vehicle Systems’ vice president of aftermarket sales. “God knows those days are long gone. Now you really have to be efficient with inventory management.”
Striking the balance
There is no magic formula for the ideal inventory breadth and depth. Every store has it own unique needs influenced by market conditions. Customer mix, geography, seasons and even legislation all drive product demand. Factor in the ever-fluctuating dynamics of the trucking economy, and even the best analysis can become guesswork.
Wisdom, experience and business savvy all play their part, and distributors have varying degrees of success relying on these attributes.
“Almost everything you order is on forecast; it’s based on history, but it’s still forecasting,” said John Minor, vice president and COO of Midwest Wheel Companies.
In steps technology. After going through numerous stages of technological sophistication to develop algorithms that factor the variables and predict inventory needs, today’s successful distributors have found ways to embrace technology within their own businesses and in cooperation with industry suppliers and marketing groups.
The process hasn’t been easy. “It’s a real tough one for the industry because everybody is on different software packages,” Minor said. “Figuring the stock out, the seasonal items and that type of thing are all written basically the same way. It’s really dependent on how effective you are in filling in all the little spaces to make sure all of the information is there as needed so that when the software crunches the numbers, the numbers come out the way you want them to.”
Vendor managed inventory (VMI) systems have brought greater automation and communication to the process, ultimately resulting in improved inventory management accuracy. At its most basic, VMI puts inventory ordering in the hands of suppliers, based on pre-established terms with the distributor such as stock levels, transaction costs and fill rates. On a schedule determined between the vendor and distributor, typically daily, the store’s transactions and stock levels are uploaded to the supplier. The VMI system automatically places product orders when the agreed upon criteria are met.
Flad said Bendix, which has approximately 25 distributors representing about 200 locations on its VMI system, has allowed the aftermarket to operate with near just-in-time precision. “With VMI, the distributor’s system is exchanging data with our system every night,” he said. “Each day I am building one-seventh of their next order. It allows us to give the distributor a better fill rate for their customers.”
Speaking with one tongue
The two biggest obstacles to more widespread VMI use are its technological implementation and the perceived loss of control.
Helping the industry overcome the first is Datalliance, a Cincinnati-based company that specializes in bridging technology platforms between distributors and vendors. Datalliance President Carl Hall said the company has successfully implemented VMI for its dozen-plus heavy-duty component manufacturer customers.
“We take inventory usage data from the distributor on a daily basis. Based on that information, our system suggests a stocking plan for that distributor and replenishment orders to fulfill that stocking plan,” Hall said. “We recalculate the stocking plan each week, making small tweaks over the course of time, taking into account the latest demand data and also the latest supplier information. So if the supplier knows they’re getting ready to obsolete a product and replace it with a new product, we can change the stocking plan with that updated information.”
There are almost as many software and hardware configurations as there are distributors using them. They range from years-old DOS-based systems to newer Windows-based operating systems, and business platforms that run the gamut of technological sophistication. Additionally, suppliers use their own proprietary systems to serve their aftermarket customers. Datalliance specializes in getting the varied systems to communicate with one another.
“Datalliance filled the role of developing a common language,” Flad said. “It was a breakthrough step.”
Distributors interfacing with the system have seen three main benefits, Hall said “We see a reduction in inventory, an increase in turns of about 25 to 28 percent. Then we saw an improvement in out-of-stocks, which was reduced by about a third,” he said. “What is frequently the biggest savings is the amount of time from an administrative standpoint spent handling the replenishment process. We see about a 50 percent reduction in time spent.”
Bill Ryan, CEO of Pittsburgh-based Point Spring and Driveshaft Co., agreed. “Our purchasing people have more time and are more productive with their time,” he said. “With the old system, they were more reactive. It took awhile for them to catch up if the market was either up or down. Now they actually forecast and project and it helps us keep that balance between inventory on-hand and customer demand.
“It has helped us become a much better company and it’s one of the things that differentiates us from the competition.”
Ryan was part of ArvinMeritor’s technology advisory board during the development of its VMI system, which links through Datalliance. His company was one of the first to conduct business with ArvinMeritor using VMI. After seeing the results, “we went on a tear to encourage our other major suppliers to get online and bring us in,” he said. Today, the company uses VMI with about 80 percent of its major suppliers.
“We have inventory on a more timely basis. The breadth of the inventory is greater. Our systems react much quicker because it gets looked at everyday and therefore we have the right product more often when the customer needs it,” he said.
VMI’s ability to help distributors achieve high fill rates is one of its greatest strengths. “With VMI, when a customer wants a product, you have it,” Flad said. “Typically the customers who are on VMI, their out-of-stock goes down 30 percent.”
Midwest Wheel’s Minor said his company uses VMI to achieve its fill-rate goal of 97 to 98 percent for the first pick (on demand); 99 percent for the second pick (available within 24 hours) and, the third pick – ordering the part from the factory – is irrelevant, he said. “In today’s world, people won’t wait for it, unless it’s a specialty product. You’re just not going to hang on to customers if you’re filling 90 percent or less.”
Also helping optimize business between distributors and vendors are aftermarket marketing groups. Most have web-based portals that allow members to better electronically conduct business with suppliers.
Pagano said Vipar’s v-Enterprise “allows members to electronically launch purchase orders with major vendors and it goes right into the vendor’s open order system, and an electronic invoice is sent back to the distributor,” among other web-based business applications. This helps expedite and improve accuracy of inventory replenishment.
IWDLink is Truck Pride’s member e-commerce platform, which improves “accuracy, speed, inventory costs, inventory control and out-of-stock situations,” said Truck Pride Executive Vice President Bill Burns. The challenge, he said, is “trying to make all of the different systems talk to each other. But once everyone gets hooked to the hub, the world is your oyster.”
Changing perceptions
Also preventing more widespread use of VMI is a reluctance to let technology intervene in the process.
“The biggest problem with inventory management isn’t the technology, it’s the perceived loss of control,” said Edward Kuo, executive director of HDeXchange (HDX).”A lot of the distributors think, ‘Why would I give up control of my biggest asset?’ But in reality, all the system is doing is improving your control. It’s giving you better visibility of what you are doing and allows you to understand from a bigger perspective, ultimately improving overall performance.”
HDX was founded in 2000 as a non-profit organization to develop standards and technologies for e-commerce across the supply chain. Datalliance is HDX’s preferred VMI partner. According to Kuo, the learning curve for using VMI is low and training requirements are minimal. Once users gain familiarity with the system, they quickly embrace it.
“VMI takes the buyer off of that product line and lets them focus on other problems, things that computers can’t resolve,” Kuo said.
Once the comfort level is established, users understand the benefits, Bendix’s Flad said “They find that it becomes highly on autopilot. It gives them more time to do other things.”
While cost and technological requirements make VMI systems more viable for larger distributors than for smaller businesses, that’s changing. As the systems continue to proliferate and as marketing groups make them seamless with their own suite of services, there will be trickle down to medium and smaller distributors.
ArvinMeritor’s Shelly Beneteau, senior manager of customer service for North America, said her company has more than 160 distributor locations using its VMI system. “We have others waiting in line for us to bring them up as we get resources available to do that.”
As more distributors recognize the advantages VMI can bring to inventory management – improved inventory turns, fill rates and profitability – it will gain popularity. “Distributors are moving business from suppliers that aren’t offering VMI to ones that are,” Hall said.
Vendors see the benefits, too. “It increases our service level to the customer and it improves our relationships with customers,” said ArvinMeritor e-commerce team leader Sherry Vinegar. “It minimizes the competitive threat and it reduces returns.”
If it’s a two-way street paved with a better way of doing business, VMI may soon be the aftermarket’s answer to the Information Superhighway.
Vendor managed inventory: Is it right for you?
Distributors using vendor managed inventory cite improvements in nearly all areas of inventory management, but for some businesses, the cost-benefit ratio doesn’t compute. As with implementing any new technology system, there are costs involved and personnel resources to adjust, both in mindset and duties.
For many, one big hurdle is Electronic Data Interchange, which communicates business documents – such as purchase orders and invoices – computer-to-computer using an agreed upon standard.
“VMI is not necessarily affordable for smaller companies because it can be expensive and a lot of companies still don’t have the EDI capabilities built into their systems,” said John Minor, vice president and COO of Midwest Wheel Companies. “If you don’t have EDI capabilities or if you have not bought that important part of the software package, you can not send the information economically.”
For example, in order to use ArvinMeritor’s VMI system, distributors must have the EDI capabilities to transfer two important documents, said Sherry Vinegar, ArvinMeritor’s e-commerce team leader.
The first is the 852 Product Activity Data document, which originates from the distributor and details inventory levels and sales transactions. This is supplied to the vendor to help determine replenishment needs. The other is the 855 Purchase Order Acknowledgement sent from the vendor to the distributor verifying the order generation of a purchase order. A distributor must be able to send the 852 document and receive the 855 document.
Because VMI requires an investment of time and money from the distributor and the vendor, their business interests much be closely aligned.
“We work with suppliers to help them talk through the issues they’re going to have rolling out vendor managed inventory and then we go with them to meet with their distributors to explain the process and explain the program,” said Carl Hall, president of Datalliance, which specializes in bridging technology platforms between distributors and vendors. “From that point on, we’ll work with the supplier to help them tweak the application and the settings within the application to meet the needs of the distributor, because every distributor has different objectives.”
