Tuesday, May 1, 2012

VMI Programs Gone Awry?

Early and in different times in my manufacturing career, I reported to two senior executives that were responsible for plant operations. While they were different in just about every imaginable way, they shared at least this one thing in common. They were both taken-in by suppliers providing parts and supplies using VMI programs. Excess inventory and price gouging were the culprits in both scenarios.

One of the two was so incensed by the experience that years later he was still personally reviewing all the requisitions for expense and C items. It was not unusual to get a call from him in the early morning hours challenging you about the need for a box of screws, wipers, or a desk chair.

In both cases, these senior executives ran into vendors selling inventory instead of vendors managing inventory. How then did these vendors selling inventory get away with it for prolonged periods of time?

Here are two tell-tale signs of a VMI program gone awry:

1. If it ain’t broke don’t fix it. Bin Inventory has a direct relationship with production floor noise level. It doesn’t take a wily vendor long to understand the culture of your manufacturing floor. Topping off bins is a much less risky activity than suffering any noise from the floor. If the floor is too quiet and the bins appear too full, it is time to get the vendor in your office to explain how ROP and ROQ is calculated and what turns they are achieving at the bin level.

2. Lumpy Gravy. We won’t accept it on our turkey dinners but we will readily accept a weekly lump sum invoice for thousands or even tens of thousands of dollars on a regular basis. Even the most jaded accounts payable manager can be lulled into a false sense of security by the monotonous beat of a constant dollar value week after week. Gone unchallenged the lump sum invoice is a breeding ground for untethered price increases. If the vendor is worth his/her salt they will have operating and financial systems that enforce contract price agreements.

What then are best in class approaches to ensure your VMI program stays in control?

1. Create Point of Use instead of Centralized Inventory Locations

2. Lean replenishment systems should be synchronized to the demand at the production cell level

3. Create easy to understand visual controls to signal inventory replenishment

4. Demand consistent application of the above three steps to keep the program simple plant wide.

5. Demand quarterly inventory turns report at the Bin level

6. Require Monthly PPV reports to a baseline cost based on shipment activity.

Don’t let your VMI go awry.