Frequently asked questions
Vendor-managed inventory (VMI) is an inventory management technique in which a distributor of goods is responsible for optimizing the inventory held by a customer. In most cases, VMI goes together with a consignment offer. This means that the goods belong to the distributor until the moment of consumption and the ownership changes only after the goods are actually used by the customer.
The majority Distributors are offering VMI together with consignment terms. The consignment offer means that the goods belong to the Distributor until the moment of consumption. All that the Buyer needs to do is to register the product usage with our smartphone application or automatically with digital scales.
Why is it necessary? When offering goods on consignment, it will make the offer to the Buyer more attractive, and the Distributor increases significantly its competitive advantage. It also increases the possibility that the buyer starts purchasing also other products from the distributor. On average, distributors that provide consignment, are increasing sales with existing customers by 17%.
For the first couple of months, sales volumes are expected to decrease when compared with traditional sales. However, thanks to higher customer loyalty and increasing cross-sales, sales volumes are expected to grow after the first months.
Why are the sales volumes decreasing at first? If the Distributor switches from standard sales to consignment sales, then with the standard sales, the Buyer stocks up products and purchases less frequently. When switched to consignment sales, then it typically leaves a small gap in the sales. This gap will be filled as soon as the Buyer has consumed X number of products and is ready to purchase new goods.
There are two possible options:
Option 1: Purchase back all the goods that have been already delivered to the Buyer from previous deliveries. This applies only to the portfolio that will be part of the consignment stock.
Option 2: The Buyer consumes existing inventory separately and at the same time, the Distributor will deliver the consignment stock that will be used as soon as the existing inventory has been consumed.
What to prefer? With ScanLocker it can be either Option 1 or Option 2. Since the consignment goods are anyhow separated and kept inside the locker then mixing up inventories will be less probable. With ScanRoom, Option 1 is recommended.
Not all goods are suitable for VMI service. The Distributor should include into VMI service mainly products that the Buyer is consuming frequently. Example: When goods are offered on a consignment basis, then the Distributor is not interested in keeping the products in the ScanLocker for 6 months because the goods belong to the Distributor and are not earning any money.
What to consider? The Distributor can agree with the Buyer that when the product is stored in a ScanLocker for more than X months, then the Buyer must pay Y% of storage free from the value of the product. For example, ask a 25% of the storage fee when the products are stored for more than 6 months in the locker.
All VMI-related invoices from Invendor will be covered by the Distributor. The Distributor in turn has several options:
Option 1: Provide the service to the Buyer free of charge and cover all the costs themselves.
Option 2: Ask the Buyer to compensate for the service. This can be either a (i) fixed monthly cost, (ii) only a hardware rental, (iii) all the costs related to VMI.
Option 3: Increase the product prices by X% to compensate for the VMI service costs.
Recommendation: Use Option 1 with the Buyers who purchase enough products (for example 2 000 EUR / month) to justify the VMI service cost and work on extending the product portfolio this way. If the sales volumes are lower, then ask the Buyer to compensate for some costs
We recommend starting your first VMI project with an existing customer with who you have good relationships. This way, the entire process will be smoother.
Afterward, we recommend using VMI with both existing customers and with new customers. If you see the potential to increase a partnership with an existing customer, then VMI can help you achieve it. If there is a new customer you would like to start a partnership with, then providing VMI together with consignment, can help you beat the competition and win this customer.
The Rule of Thumb: Make 1 delivery a week. This depends on the speed of consumption and whether the Buyer is using ScanLocker or ScanRoom to store the goods.
With ScanLocker, we recommend keeping all buffer levels (maximum inventory level) in an amount of 2-week maximum consumption which equals 3-week average consumption.
With ScanRoom, buffer levels can be higher if necessary and there is enough room to store the goods.
In some cases, if the consumption is high, you can agree on multiple deliveries a week. PS! Always agree on a certain weekday for deliveries which is suitable for both parties.
This question mainly applies to the scenarios when ScanLocker is used.
We recommend the Distributor to agree that the Buyer will fill the locker when goods are delivered. In doing so, the Distributor can use 3rd party logistics to deliver the goods and cut the costs. We also recommend doing stock counting once a quarter to make sure the Distributor has the right data about inventory quantities.
If this kind of agreement is not possible, then the Distributor can either provide the replenishment service free of charge or ask for a service fee for each visit. The cost of the visit depends on the Buyer’s location. We’ve seen Distributors ask for this service from 20 to 50 EUR per visit.
Whenever possible, we recommend using ScanRoom solution because there are fewer costs involved, and makes the solution more profitable for both parties. For that, the Buyer must have a separate and access-controlled warehouse. If there is no access control, then our ScanRoom solution includes an access device, and the Buyer must have a warehouse door with an electric lock.
ScanLocker is a suitable option when the Buyer wishes not to allow most people into the warehouse and keep only some faster-moving goods inside the locker. This is also the case when the factory is working 24/7 and the warehouse is closed during night shifts.
Sometimes, even if a suitable warehouse is available, then the Buyer might still prefer a locker.