Cost Analysis and Impact of
Vendor Managed Inventory (VMI)
Introduction
Generating purchase orders, inventory monitoring, and requesting expedites from suppliers are daily occurrences for purchasing professionals at manufacturing companies. Vendor Managed Inventory (VMI) is designed to lighten the load of procurement departments by managing inventory levels and replenishing based on real-time data, ultimately leading to an increase in efficiency and cost savings.
Objective
This case study aims to quantify these costs and assess the potential savings through Romo Durable Graphics VMI program. By analyzing internal data and interviewing procurement professionals whose companies use our VMI program, we gathered quantifiable results.
Time and Cost Quantification
Time Spent on Purchase Orders
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Daily review of MRP reports and creation of POs takes approximately 30 minutes per day.
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Weekly physical inventory checks add 3 hours per week.
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Coordination with suppliers adds another 1 hour per day.
Shipping Costs
Romo delivery of VMI products to a customers largest location showed an annual cost savings of approximately $65,0000 vs. shipping UPS. Adding in this customers other 3 locations that Romo delivers to, the estimated annual cost savings VMI delivery provides is $130,000.
In addition to raw shipping costs, there is time saved for warehouse staff in receiving the items, tracking inventory, and stocking the shelves. In attempt to quantify time saved, we estimate it to be around $2,420 weekly by doing $22/item/per week. $125,840 annually.
The cost determined is based on UPS Ground shipping each purchase order separately. There are approximately 110 parts in total.
Paperwork Costs
- Completing paperwork for each individual order is no longer necessary with VMI, including packing slips and ASN check-ins.
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- This process can consume approximately 15 minutes per order, leading to further inefficiencies.
When asked what the paperwork process looked like for VMI PO's, Michelle Risch of Rehlko said it's as simple as,
"Cut it and leave it"
Michelle Rish is a Material Scheduler for Rehlko (previously Kohler Energy) who’s procurement department utilizes Romo’s VMI program.
VMI Advantages
Time Spent on Purchase Orders
- With VMI, the process of generating POs occurs once a year, significantly decreasing the daily workload for entering POs. The price never changes regardless of quantity delivered, eliminating pricing request.
- The time required for monitoring and managing orders reduces from daily to weekly, saving several hours per week.
Inventory Management
- VMI allows for blanket POs based on historical data, reducing the need for continuous checks on inventory levels.
- This leads to less physical inventory counting, as orders are adjusted automatically based on usage.
Receiving Process
- With VMI, the receiving process is more efficient, reducing the likelihood of misplaced items and the time spent tracking shipments.
- Romo drivers stock inventory in your warehouse and monitor inventory, communicating back to the office for the next visits replenishment numbers.
- We stock our customers shelves with product, eliminating the need for handling material and physical receipts of individual orders.
Conclusion
Based on the analysis conducted through interviews and internal data, the estimated cost savings from implementing Romo’s VMI program can be broken down into three key areas: time savings, shipping cost savings, and paperwork cost reductions.
The implementation of Romo’s VMI program has demonstrated significant advantages for our customers. Through our case study, we quantified the time and cost savings associated with the transition from traditional procurement practices to VMI.