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War Stories: Vendor-Managed Inventory

Bruce Merrifield, President — Merrifield Consulting

•profit strategy •expert interview •profit war stories

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In this video, Bruce Merrifield and I discuss vendor-managed inventory programs (aka VMI programs).

VMI programs could be quite useful in solving some very specific problems that wholesale distributors run into all the time. In fact, it's a great avenue to not only solve the profitability issue (see other War Story videos), but also to build a better customer relationship that can pay off in terms of loyalty.

Let's say that you have a customer who buys things that are quite profitable, but the overall profitability is being dragged down by lots of transactions. These transactions may be low volume or low value or both, and they're affecting the cost to serve to your customer. The problem might be that the customer is ordering just enough to get by. This can result in emergency rush orders for even relatively minor items, and those usually end up costing you profits.

"It's like a customer who only keeps his desk stocked with two and a half days of supplies," says Bruce, "which means that every two and a half days he needs to place another order. What happens when an item is lost or misplaced in this situation? How much downtime will your customer suffer for the lack of a paperclip?"

A variation on the problem is the client who wants to top everything off once a month. "Well, some of these items," Bruce notes, "are so small that it's like $2 or $3 a month. What if I just gave them a year's supply?" Some items could be topped off on a weekly or monthly basis, but a uniform monthly plan can create a problem for both the client and customer when it comes to the small stuff.

By discussing total annual consumption with customers, you can figure out the most effective way to schedule supplies, which helps the customer avoid downtime and reduces unnecessary transactions, and saves paperwork. The process will also build loyalty and make your customers think twice about switching suppliers. A VMI Program, when structured properly, is actually a customer-centric demand replenishment solution that drives sales. Watch the video above to learn more about VMI.

For more information about Bruce Merrifield, visit: www.merrifieldact2.com

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