How Consignment Vendor Managed Inventories Can Help Retailers During Recession by Dwight D Padgett

In 2008 and 2009, the United States suffered the largest economic downturn since the Great Depression of the 1930s. Unemployment soared and market demand plummeted leaving corporations and manufacturers scrambling to downsize, and many small retail businesses lacked the volume to generate enough sales and cash flow to survive. These small retail businesses could have utilized a concept of supply chain management called consignment vendor-managed inventory (VMI) as a tool to aid in survival. Numerous small lumber yards are enduring the current housing crunch by practicing a form of consignment VMI to increase inventory turns and improve cash flow. Retailers in other industries can benefit from this application just as these building materials retailers have. Retailers can take advantage of consignment VMI because it builds relationships within the supply chain, it can improve return on investment, and it provides retailers with the ability to alleviate inventory burden while still maintaining the ability to meet consumer demand.

Supply chain relationships are detrimental to the existence of a retail business, especially during an economic recession. VMI applications can facilitate and grow these relationships, “companies that develop mutually beneficial competencies with their suppliers/customers – via a VMI application – and leverage those competencies earn a number of important business benefits (Duchessi & Chengalur-Smith, 2008, p. 123)”. These benefits can include a preferred status with the vendor, and in return, yields better pricing, service, and information sharing.

Return on investment (ROI) is a key measure for a business as a going concern. This measure incorporates operating asset turnover, or inventory turns, with margins. Many of the items that consignment VMI includes are fast turning and low margin items. Combining consignment with VMI is “the process of the supplier placing goods at a customer location without receiving payment until after the goods are used or sold (Evanko, 2010, p. 32)”. This is a just-in-time method of inventory management, which increases inventory turns therefore enhancing ROI.

Cash flow is detrimental to a retailing business during an economic recession. Consignment VMI allows retailers to utilize cash flow to invest in operations rather than carrying those dollars in inventory. Other costs in association with carrying inventory include shrinkage and insurance costs that directly tie to inventory levels. In other words, the lower the inventory levels the less a business will have to pay in insurance, and the less it will lose due to pilferage, spoilage, and theft. Therefore, “the savings from reduced inventory result in increased profit (Jacobs, Chase, & Aquilano, 2009, p. 546)”. Although a business does not directly own the inventory sitting on the ground, yet it retains the ability to meet the needs of the customer because the inventory is readily available without carrying the financial burden of the inventory. Therefore, the retailer is not sacrificing in providing product to its customer, and is maintaining a healthy level of service to the consumer.

Consignment VMI can allow small retailing business to reap crucial rewards, especially during economic recessions. Although, it does have some drawbacks, such as initial start-up costs and training employees to manage and use the software necessary to utilize consignment VMI. In addition, businesses have to establish an adequate level trust with vendors before the vendors consent to a consignment VMI program. However, the pros of a consignment VMI program outweigh the cons. Retail businesses can benefit from strategic partnerships with suppliers within the supply chain, and VMI programs can be a means to establish and nurture these relationships. These relationships are a necessity in weathering economic downturns, making a business become more efficient at managing profits, and more effective at providing service and product to its customers.

References:

Duchessi, P., & Chengalur-Smith, I. (2008). Enhancing Business Performance: via Vendor Managed Inventory Applications. Communications Of The ACM, 51 (12), 121-127.

Evanko, P. (2010). Vendor-Managed Inventory. HVACR Distribution Business, 32-35.

Jacobs, R. F., Chase, R. B., & Aquilano, N. J. (2009). Operations & Supply Management (12th ed.). New York, New York: McGraw-Hill/Irwin.

“You were not born a winner, and you were not born a loser. You are what you make yourself to be.” – Lou Holtz

Author: Dwight D. Padgett
Company: Tindell’s Building Supply
Position: General Manager-Lafollette, TN Profit Center

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