Purchasing and Negotiation Training

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

The issue of a supplier holding and managing customer inventory has many manifestations, all of which have positive and negative cost  influences.  Here are four of the most popular:

Make and hold                       Under the “make and hold” strategy common to the manufacturing industry, a supplier manufactures an entire order at once and releases quantities as needed by the customer.

Just in Time (JIT)                  Just in Time” delivery happens when a supplier manages the inventory so intensively that it is shipped exactly when the customer needs it.

Vendor Managed Inventory  (VMI)                        This is a business process where the supplier monitors the customer owned inventory on hand at the customer’s sites and ships replenishment as required

Vendor Owned Inventory (VOI)                     This refinement of VMI differs only in that the inventory is owned by the supplier and not billed until shipped, or in some cases, incorporated into a finished product by the customer.  This is not only a cash flow advantage to the customer, but keeps inventory off the balance sheet.

No matter what the inventory arrangement you strike with a supplier, be aware of the advantages and disadvantages of buying material and having the supplier store rather than ship it. For instance, it may pay to do so if you don’t have storage space or if the supplier can keep the inventory at less cost than you can.

Some suppliers will even buy or produce material without a firm order from a good customer on speculation, especially if they know they can sell it elsewhere. At times, if you have been a good customer, the supplier may take a calculated risk and put the goods in inventory and hold it without any apparent cost to you until you order it. Nevertheless, there is a cost that the supplier must bear whether it is realized or not. Storage space, material handling, utilities, rent, and other business expenses are not free.  Moreover, inventory “shrinkage” risks of loss, spoilage, theft, and shelf life may impose considerable costs.  These costs incurred by the supplier could be used in other ways to generate income.

Suppliers who know their costs must eventually pass those costs on to the buyer. Those who are not aware of the holding costs are vulnerable to the competition. If you are obtaining so called free storage from a supplier make sure you periodically check prices with other suppliers. You may be surprised what the differences are. The difference may in part be the cost of holding the goods in stock.

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Determine whether the supplier is aware of these costs

Be careful not to encourage or allow a supplier to stock your proprietary or custom inventory for you even without an order. If your company decides to change the design or do away with that product altogether, you may have to pay for the goods. The supplier may go to court and present a good case that they have been dealing with you for a long time and receiving order after order. They may say that you never gave them any warning that you would no longer need the goods. These types of cases have been settled at substantial cost to the buying organization.