One of my first reporting jobs was covering home improvement retailing full time for a trade publication in New York. I learned all the ins and outs of retailing on that beat, including the wonders of vendor-managed inventory. Big chains such as Home Depot and Lowe’s saved a bundle on their operating costs, I discovered, because they could move much of the administrative work of keeping their shelves stocked and their assortments optimized down the supply chain to their key vendors.
Back then it never crossed my mind that small businesses could benefit from VMI, too. But my supply-chain guru Jon Schreibfeder, president of Effective Inventory Management in Dallas, says he’s seen many small businesses take advantage of VMI’s efficiencies.
Small business vendors generally operate in a bit of a black hole; they get orders, send them off, and don’t really know whether the goods sold fast, slow, or not at all, or if particular styles did better than others. By becoming VMI partners, the vendors incur some cost, but they get valuable information that helps them sell more in return; so it can still be an appealing trade-off.
There are some fine points to successfully adopting VMI for a smaller business vs. a retail giant, I learned. Here are some of Schreibfeder’s tips:
- Safeguard your data: VMI involves sharing sensitive information about your company with an outside party; you’re going to hook your data systems right up to your vendors so they can see what you sell in their category and when you sell it. Make sure you have a strong confidentiality agreement in place before you allow a vendor real-time access to your inventory information. The last thing you want is for your competitor to know exactly what you’re paying for a carton of yogurt and which flavors are your best sellers. Computer security will be paramount here, on both ends.
- Make medium-size vendors your best partners: National supply giants likely won’t want to be bothered to do the VMI work for a small business, Schreibfeder points out. Vendors incur costs doing VMI, and you’ll likely be too small-fry for huge suppliers. Medium-size vendors will be large enough to be able to absorb the additional cost on their end. And you’ll be an important enough customer that the opportunity to sell you more product more cost-effectively, thanks to the inventory knowledge the vendors will gain, should interest them and make it worth their while.
- Know your partners: These vendors are going to make critical decisions that will affect your business. You are trusting them to keep your shelves appropriately stocked with high-margin items and to keep your data private. Prospective vendor-partners for VMI should be investigated: Call references, review their bank statements, and make sure they’re reliable and won’t suddenly disappear on you.
- Iron out the details: Make sure your contract is highly specific about which products the vendor will manage, what stocking levels are expected, and what the policy will be for returns.