Demand-driven customer relationships

Seeing Customer Demand

Normally, a wholesaler-distributor only sees orders from its customers, not actual usage or consumption.  The uncertainty and variability caused by a lack of true demand information leads both distributors and their customers to stockpile extra inventory, reducing the overall efficiency of a supply chain.  Note that this lack of visibility also holds back the efficiency of relationships between wholesaler-distributors and their suppliers. (See Building a lean supply chain) 

Wholesaler-distributors and their customers can share point-of-sale and product movement information electronically through vendor-managed inventory (VMI).  VMI refers to the practice of making an upstream supplier responsible for determining order size and timing by a downstream customer.

VMI relationships allow a wholesaler-distributor to gain visibility about a customer’s actual usage rather than just seeing a customer’s orders. For example, a wholesaler-distributor receives electronic data about a customer’s sales and inventory stock levels. The wholesaler-distributor is then responsible for creating and maintaining the proper level of inventory. Under VMI, the distributor, not the customer, generates the order.

VMI is already used by almost one-third of wholesaler-distributors, although its use is expected to double over the next 5 years. (See Exhibit, below.) The greatest use of VMI occurs with customers operating from a fixed location, such as a manufacturing plant or retail store, versus customers operating at different job locations on different days, such as contractors.

VMI relationships continue to expand

Source: Facing the Forces of Change: Lead the Way in the Supply Chain

Note that traditional VMI systems do not require transmission of EDI 867 documents. Instead, VMI systems usually rely on transmission of the related EDI transaction set 852 (Product Activity Report), which contains inventory levels and changes in product activity, such as the volume of products sold.  However, product activity is reported as a single data point without regard to where the product is moving. Product activity is useful for determining restocking levels under a VMI relationship, but it is not sufficient to provide true point-of-sale data between supply chain partners.

VMI in action
Traditionally, the application of VMI is perceived to be much more limited with small contractors because they have short purchasing horizons geared toward the current job and day’s work. Contractors often need materials right away for pickup or same-day delivery.

However, Barnett (www.e-barnett.com), a distributor of plumbing, HVAC, electrical, and hardware products to professional contractors, developed a creative truck inventory replenishment program that allows the company and its plumbing customers to take advantage of the demand-driven trend.

A Barnett sales rep works with a plumbing contractor to create a standard truck stock list for each service truck. After the plumbing contractor completes a job, he/she notes the parts used on an order sheet or scans the appropriate bar code using a Barnett-provided inventory scanner. Orders are transmitted electronically to Barnett at the end of each workday, and this provides an almost real-time view of end customer demand. Barnett then ships by truck replenishment inventory.

By gathering point-of-use information electronically, Barnett is able to optimize its inventory levels, increase service levels, grow sales per customers, and build strong customer loyalty. The plumbing contractor benefits from more accurate truck restocking, lower warehouse labor costs, and dramatically reduced inventory carrying costs.

Demand-based forecasts allow a distributor to ensure that the right products are in stock at the right time and in the right quantities. Buying correctly increases operating cash flows by reducing excess inventory investments. Fewer out-of-date or obsolete products will remain in the warehouse, so that less inventory is eventually written off. 

The world is changing, and wholesaler-distributors must keep evolving in order to stay relevant in their respective industry’s supply chain.  VMI is a real-world technology that can provide new value to customers while providing an excellent opportunity for supply chain leadership by wholesaler-distributors.