To deliver products to customers more efficiently, some organizations are managing inventory at their customer sites. Vendor-managed inventory (VMI) programs can be advantageous for customers because vendors often have the expertise needed to better anticipate demand or inventory needs. The vendors benefit as well because if access to customers’ inventory data is made available, a VMI program can more effectively automate what are often labor-intensive manual processes.
Data from APQC’s Open Standards Benchmarking in logistics indicates that 52% of participating organizations have implemented VMI programs at customer sites. Of those that have implemented this practice, 21% have done so extensively, and 31% only to some degree.
To determine how managing inventory at customer sites could affect logistics performance and costs, APQC compared the total cost to manage logistics and warehousing and number of logistics employees needed for those organizations that have adopted VMI against those of non-VMI organizations. The data reveals that although organizations managing inventory at customer sites need fewer logistics employees, they have higher costs for managing logistics and warehousing.
Logistics Cost and Employees
APQC first evaluated the performance of the two groups with regard to the total cost to manage logistics and warehousing per $1,000 in revenue. Figure 1 presents the median performance for each group.
Organizations that manage inventory at customer sites spend $5.12 more per $1,000 in revenue to manage logistics and warehousing than the non-VMI respondents. Although the cost difference may not seem significant, for a company with $5 billion in revenue annually, this would amount to an additional $25.6 million associated with managing logistics and warehousing.
APQC also evaluated the two groups of organizations with regard to the number of full-time equivalent employees (FTEs) needed to manage logistics and warehousing per $1 billion in revenue. Despite their higher logistics costs, VMI organizations require fewer FTEs to manage their logistics and warehousing. At the median, they require 101 FTEs per $1 billion in revenue, whereas organizations that have not implemented VMI need 107 FTEs per $1 billion in revenue (see Figure 2). Fewer FTEs means lower personnel costs for logistics and warehousing at these organizations.
Focus on the Customer
APQC’s data indicates that the management of inventory at customer sites does not automatically result in superior performance across logistics metrics. Although companies that have adopted this practice need fewer FTEs to manage logistics and warehousing, they spend more on this process than the non-VMI respondents.
Several factors could contribute to the higher logistics and warehousing costs associated with implementation of inventory management at customer sites. For example, it could be that implementation requires companies to spend more on systems and technology needed to track customer inventory information for multiple sites. In addition, the VMI organizations may lease space at customer warehouses as part of their inventory management practices. This would add to costs through the lease as well as through the operating costs associated with having offices at customer sites.
APQC’s results paint a complex picture of the potential effects of managing inventory at customer sites on logistics performance. Adopters of this practice may invest more in tracking customer inventory and demand information. Yet with the need for fewer logistics FTEs, organizations looking to manage inventory at customer sites should take additional measures to ensure that performance does not falter. Maintaining a focus on customer satisfaction can give organizations a competitive advantage, especially if they are one of the few vendors in their industry to offer this kind of service to customers.
Becky Partida is a research specialist, supply chain management, with APQC, a member-based nonprofit and one of the leading proponents of benchmarking and best practice business research.