Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Co-Managed Inventory to Cut Stockouts 80 Percent
Transcript
- Lucas: So there's this procurement case that keeps coming up in supply-chain circles — a mid-size medical device manufacturer based out of Minneapolis. They make specialized surgical instruments, low volume, high mix — think three hundred different SKUs, average batch size maybe fifty units. Luna: Right, not the kind of thing you can just stockpile and hope for the best. Lucas: Exactly. And their problem was chronic stockouts on about thirty percent of their critical components. That meant frequent expedited shipping — air freight instead of ground, sometimes overnight courier — which was eating into margins badly. Their procurement lead estimated they were spending over four hundred thousand dollars a year just on rush shipping. Luna: Ouch. And I assume they'd already tried the usual fixes — min-max buffers, safety stock formulas, maybe even demand forecasting software? Lucas: All of the above. They had decent forecasting — about sixty-five percent accuracy at the SKU level — but the long lead times on some specialty raw materials meant they were always reacting. So they decided to try something they'd been resisting for years: co-managed inventory. Luna: Which is different from traditional VMI — vendor-managed inventory — in a pretty important way, right? Lucas: Very different. In a classic VMI model, the supplier owns the inventory until it's consumed, but they also own the replenishment decision based on data you share. In co-managed inventory, the supplier still holds ownership — or at least partial ownership — but the buyer retains control over the replenishment triggers. You're co-managing the inventory levels together. Luna: So the buyer sets the rules, the supplier holds the stock physically closer — maybe even on the buyer's floor. Lucas: That's exactly what they did. They set up what they called 'supplier-managed bins' — physical bins right on the factory floor for about fifty critical components. The supplier got real-time visibility into bin levels via a shared dashboard. When a bin hit a predetermined reorder point — say, when it dropped below forty units — the supplier got an automatic alert. They had to replenish within seventy-two hours. Luna: Seventy-two hours — that's pretty tight for specialized components. Did the suppliers push back? Lucas: Some did, initially. The buyer started with just their top five suppliers — the ones where they had the strongest relationship and the most spend concentration. Together those five suppliers accounted for about forty percent of the critical-component spend. The buyer said, 'Look, we'll share our demand forecast more granularly — weekly instead of monthly — and we'll guarantee a minimum purchase volume. In exchange, you hold safety stock in our bins.' Luna: So they de-risked it for the suppliers. Makes sense. What were the results after, say, six months? Lucas: Pretty striking. Stockouts on the covered components dropped from about thirty percent to under six percent — roughly an eighty percent reduction. Expedited shipping costs on those items fell by about three hundred and forty thousand dollars in the first year. And the buyer's on-hand inventory value actually decreased by about twelve percent because they weren't carrying as much safety stock themselves. Luna: Wait — inventory value went down even though they had more supplier-owned stock on site? How does that math work? Lucas: Because before, they were holding high levels of safety stock for every component — sometimes three to four weeks' worth — because they didn't trust the lead times. With the co-managed bins, the supplier committed to the seventy-two-hour replenishment window, so the buyer could cut their own safety stock down to one week. The supplier's stock in those bins was still inventory, but it wasn't on the buyer's balance sheet. Luna: Right — off-balance-sheet inventory. That alone can be a huge win for a procurement team that's trying to improve working capital ratios. Lucas: Exactly. The buyer's CFO was happy because inventory turns improved from about four times a year to nearly six. And the suppliers? They benefited too — more predictable demand, fewer emergency orders, and longer production runs because they could batch their replenishments. Luna: So it's not a zero-sum game. Both sides actually came out ahead. That's the kind of case study that makes you wonder why more companies don't do this. Lucas: I think the barrier is trust and data-sharing. You're giving a supplier real-time visibility into your consumption patterns. Some procurement teams worry that information could be used against them in price negotiations. And implementing the shared dashboard and bin-tracking technology requires an upfront investment — maybe twenty to fifty thousand dollars depending on the scope. But for this company, the payback period was under four months. Luna: Four months — that's a no-brainer. Were there any hidden costs or unintended consequences? Lucas: One thing they had to manage carefully was bin ownership and liability. What if a bin got damaged? What if inventory was stolen? They ended up writing a simple addendum to their supplier agreements clarifying that the supplier retained title to the goods until they were pulled from the bin, and the buyer was responsible for the bins themselves. Also, not every component qualified — they excluded items with very volatile demand or extremely long lead times. Luna: So it works best for components with relatively stable demand and short-ish lead times. What about high-volume, low-variety environments — like automotive or consumer electronics? Lucas: Co-managed inventory can work there too, but the economics are different. In high-volume settings, you're often better off with a full VMI or even consignment inventory because the transaction costs of managing individual bins can outweigh the benefits. The sweet spot really is that mid-range: moderate volumes, moderate variety, where the cost of a stockout is high but the cost of holding inventory is also painful. Luna: That describes a lot of manufacturers, honestly. Medical devices, aerospace components, specialty chemicals — all those industries where one missing part can stop a production line. Lucas: Right. And the beauty of the co-managed model is that it's relatively low-tech to start. The Minneapolis company began with just a spreadsheet and some phone calls. The shared dashboard came later, after they proved the concept. So it's not a technology play first — it's a relationship play. Luna: Interesting. So a procurement team could test this with just one supplier, a single critical component, and a manual check sheet — see if the rhythm works before scaling. Lucas: Absolutely. In fact, that's exactly what I'd recommend. Pick one supplier you trust, one component that's been a chronic problem, and propose a three-month pilot. Define the reorder point, the replenishment window, and the communication protocol. Measure stockouts and expedited costs before and after. If it works — and the data suggests it likely will — you've got a template you can roll out. Luna: And if it doesn't work, you've only risked one component for three months. That's a low-cost experiment with a potentially huge upside. Lucas: Exactly. And honestly, if today's episode was worth the price of a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It's a small way to keep the show ad-free and focused on cases like this. Luna: Yeah, and it really does help. We hear from listeners who say these episodes have saved them thousands — that's the kind of impact we want to keep making. Lucas: So back to the Minneapolis case — after the first year, they expanded co-managed inventory to twelve suppliers covering about a hundred components. Stockouts across that expanded set stayed below five percent, and total expedited shipping costs dropped by more than half. Luna: And what about the suppliers — did any of them decide to walk away after the pilot? Lucas: One did, actually. A smaller supplier couldn't meet the seventy-two-hour replenishment window because of their own capacity constraints. The buyer transitioned that volume to another supplier. But the other four stayed on and even asked to expand the number of components in their bins. Luna: So the model also acts as a natural filter — suppliers that are responsive and reliable get deeper partnerships, and the ones that can't keep up get culled. That's a side benefit procurement doesn't always talk about. Lucas: It's a real one. The procurement lead told me that before co-managed inventory, they had no systematic way to differentiate supplier performance on responsiveness. Now they have hard data on replenishment times. It changed how they evaluate suppliers overall. Luna: Alright, so I think the big takeaway is: co-managed inventory isn't just about reducing stockouts. It's a tool for building better supplier relationships, improving working capital, and even sharpening your supplier evaluation process. Lucas: And it's accessible to almost any procurement team willing to start small. The Minneapolis company proves it. If you're sitting on chronic stockout problems and high expediting costs, this is worth a look. Luna: Yeah, a low-risk pilot with big potential returns — that's the kind of procurement story we love to share. Lucas: Next episode, we're going to look at something a little different: how one buyer used a contract renegotiation framework to recover price increases after a raw material spike. That one's got some real numbers in it. Luna: Looking forward to it. Until then, keep buying smart.