Many distributors are wary of giving their suppliers the power to determine their inventory levels, and justifiably so. The (usually) friendly antagonism of manufacturer sales managers trying to load up distributors' shelves to boost their own sales numbers has been part of the game since distribution began.
It doesn't have to be that way, though. Vendor-managed inventory (VMI) is no longer a radical concept in electrical distribution — the concept has been around since Wal-Mart and Procter & Gamble started working on it in the 1980s, and first appeared in the electrical industry in the early ‘90s — but it's still rare enough that getting a look at a VMI relationship that works for all involved brings some valuable insights.
Graybar, St. Louis, understood years ago that working with its suppliers on inventory could improve efficiencies throughout the supply chain. Since 1992, the company has been using several planning tools to engage in VMI with suppliers. About four years ago, it added VMI services provider Datalliance, Cincinnati.
Datalliance has been providing VMI services since its founding in 1991, and has been working in the electrical industry for the past 10 or so years, says Bob Jennings, vice president of sales and marketing. Datalliance is working with about 18 electrical manufacturers and about 75 electrical distributors, and has similar market share in automotive and truck parts, Jennings says.
The VMI services Datalliance provides are handled through a “software as a service” (SaaS) format, where all the software is managed on Datalliance web servers and suppliers and distributors send and receive data and reports over the Internet. Fees for the service are paid by the manufacturers. “The payback for the suppliers is to increase sales. Suppliers have reported to us that that is a more lasting payback for them than asking the distributor to share in paying for the cost of the program,” Jennings says.
Graybar had established VMI relationships with several large suppliers when it approached Berk-Tek in 2005. Berk-Tek, New Holland, Pa., part of the Paris-based global cable manufacturer Nexans Co., was very interested. Berk-Tek manufactures fiber-optic and copper structured cabling products for LAN, SAN and data center installations. The company produces over 20,000 SKUs in three manufacturing plants in Pennsylvania and North Carolina, and Graybar is one of its largest distributors.
One of the realities of Berk-Tek's business is that demand is often project-driven, such as for construction of a new office building, which creates demand spikes that can be difficult to manage. When the company ran the business case for VMI, the results were promising.
“The ROI was certainly compelling, but our decision to proceed was also based on strategic advantages we could get from VMI,” says Paul Trunk, senior vice president of sales and marketing for Berk-Tek. “Among these were additional benefits in improved trading partner relations with Graybar and, potentially, Berk-Tek's other large distributors.”
“We were looking for a way to improve our process to eliminate human error, reduce time and effort for both our distributors and Berk-Tek, and gain better visibility of demand,” says Trunk. “When the distributor initiates its own replenishment orders, the process is labor-intensive, prone to error, and generally not ideal for a large distributor,” Trunk says. “Data-entry errors can be costly for both us and our distributors. It makes a difference if an order for 600,000 feet of cable is mistakenly placed as 6,000,000 feet.”
In addition to streamlining the replenishment process, addressing these matters would improve Berk-Tek's ability to forecast production requirements. Better information would allow them to smooth out the demand spikes and improve production efficiency.
Forging the agreement to govern the VMI relationship is a critical part of the process. It can also be one of the most challenging parts, because the distributor and supplier must be absolutely clear about what they want from the relationship and very open about inventory levels, investments and how discrepancies will be handled. This lays the groundwork for a relationship of mutual trust.
For example, to ensure that Graybar's branches wouldn't suddenly be bursting with more Berk-Tek cable than they needed, the agreement spells out how overstocks are to be handled. “We agreed that if they get into an overstock situation, we'll buy the inventory back — no harm, no foul,” says Lisa Taranto, S&OP business analyst for Berk-Tek, and the point person in working with Graybar under the VMI program.
Both parties must agree on certain targets: typically an inventory turns target and some measurement of customer service, such as out-of-stock percentage, says Tom Hoar, director of sales, Electrical and Datacomm, for Datalliance. “Those (targets) can be created corporately, by product type, by groups of locations like districts or regions. Most commonly it's a corporate initiative. Then you create a benchmark — ‘Here's where performance is today, and here's where we'd like to see it get to’ — then you set up a regularly scheduled way to evaluate whether you're moving toward those goals or not. If so, great. If not, we've got to understand what we can change to get there.”
The Datalliance system includes very flexible functionality for generating reports. The system automatically sends out performance review statements that alert both supplier and distributor to how the system is working and highlight any discrepancies that need to be addressed. These can be set up monthly, quarterly, or however often the parties want updates.
Once the agreement is in place, implementation begins with setting up the distributor ERP system to deliver all inventory data on the supplier's products into the Datalliance system, including historical data on which initial forecasts can be built. Most current distributor ERP systems used in the electrical industry have all the necessary capabilities to provide this data, says Hoar.
“The distributor needs to be able to send daily sales and inventory information,” says Hoar. “This tends not to be a challenge for the average to large electrical distributor. All the major business systems have that capability. Second, the distributor has to be able to receive an electronic copy of a purchase order — EDI 855 — and the business systems in electrical industry have that capability, too. Since we're sitting in the middle, we don't care when or how the information comes to us, we just need to know the distributor will be able to reliably create this information, then we'll figure out the rest.”
To implement the program with Berk-Tek, Graybar started in one of its Chicago District branches. “We validated that everything was working properly before we rolled it out to the entire district and then company-wide, including our zone warehouses,” says Mike Dumas, Graybar vice president, Comm/Data products. “Since then, we've reverse-engineered our process, and now we start with our zones and move out to the branches. That allows us to initially get the SKU investment-level data for that zone — what's there, how fast is it moving — all the metrics for forecasting.”
It generally takes four to six months to get a location, such as a zone warehouse, up and running with VMI for a supplier and then generally an additional three-to-six months for full implementation, says Graybar National Inventory Manager Rick Turner.
Once the system is up and running, the changes in the relationship between supplier and distributor show up immediately.
“What was most compelling was that we would have control, the ability to see real-time snapshots from as high a level or as low a level as we wanted, which allows us to be not so reactive, more proactive,” says Taranto of Berk-Tek. “The difference is that I'm aware of a lot more. If we have ten locations from Graybar ordering the same product, we can expedite and prioritize. For example, when I launch an order, I can look at any location that's out of stock and prioritize accordingly.”
Berk-Tek's inside sales people now spend the majority of their time dealing with strategic issues such as new product introductions and helping with inventory transfers rather than reacting to expedite requests and fixing order errors. When Graybar has a large project on the boards, they submit a project feedback form that tells Berk-Tek to make adjustments in the VMI system so the replenishment levels shift to accommodate that increased demand.
Because Datalliance's services are based on the SaaS concept, implementation was pretty effortless, says Taranto, with a couple of days of on-site training and answering questions, she was up and running.
“One of the biggest things we agreed on with Graybar from the beginning was, ‘Let's trust the system.’ Datalliance does this, they're good at it, let's let it work,” Taranto says.
The results have been positive for all involved. Berk-Tek saw an immediate increase in sales through Graybar, which it attributes to fewer stock-outs and better visibility of its product line, as well as making it easier to conduct business with confidence.
“At the same time that we were increasing sales, we also enhanced our market share within Graybar by increasing the number of active SKUs over 18 percent,” Trunk says. “Inventory turns improved nearly 30 percent and stock-outs were reduced to an all-time low of 3.1 percent, which tells us that VMI is helping us run our business more effectively.”
The benefits for Graybar start with a closer relationship with an important supplier, says Dumas. “They (Berk-Tek) now have a stake in the game for the accuracy of our inventory. We get better turns, lower total inventory investment and less obsolescence and slow-moving product. This translates into better utilization of our cash and resources — in other words, profitability.”
Distributors thinking about getting into VMI should be aware of a few things, says Datalliance's Jennings. “Strategically, the distributor should think about, ‘Who are my suppliers who are important to me for the long run?’ Those are the people you should think about doing this with. Take the 10 percent of your suppliers that are lifeblood of your business.
“We typically find a significant improvement in turns for the distributor. If I'm a distributor for this company and stocking $1,000 of their products, do I really care? If I'm stocking $10 million, I care. There's not enough of a payback if the dollars are small.”
Graybar now has more than a dozen supplier relationships either already doing VMI or in the implementation process. “Certainly we want to do it with our largest, most significant suppliers,” says Dumas. “We have seen significant service, performance and financial benefits in every case with the large suppliers. If we have significant inventory or high transactions with a supplier, we'll sit down with that manufacturer and go through the Q&A session to make sure it's a good match. It has to be a joint, mutual opportunity before we will press forward.”
Distributors in the electrical market have some built-in advantages when considering VMI, says Hoar. “The electrical marketplace tends to be progressive, tends to look for ways to take costs out of the system, tends to have large players and mid-sized players willing to try new things. That's not the case in every industry. There's a level of trust in this industry that makes it easier. That's not often found, and that's a key ingredient to making this work well.”
When it does work well, VMI benefits both distributor and supplier, adds Dumas. “We want to be the lowest-cost, highest-value channel partner to our manufacturers and customers, and this is one way we can do that. It delivers benefits to all participants.”