Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Cut Supplier Lead Times by 40 Percent with Vendor-Managed Inventory
Transcript
- Lucas: If you're a procurement pro, you've probably heard the phrase 'vendor-managed inventory' — VMI — and dismissed it as something only big retailers do with their biggest suppliers. Luna: Right, Walmart and P&G in the 80s. That's the classic example. Lucas: Exactly. But today I want to talk about a mid-size medical device company — let's call them MedCore — that rolled out VMI with six of its critical component suppliers and cut average lead times from twelve weeks down to seven. Luna: That's a forty percent reduction. What was the trigger — were they facing a shortage? Lucas: Not a shortage, but a growth problem. MedCore had won a multi-year contract with a large hospital network, and their existing purchase-order model simply couldn't scale. They were placing orders eight to ten weeks out, and if a supplier was late by even a week, the production line stopped. Luna: So the idea was to have the suppliers hold the inventory closer to MedCore's production schedule, rather than MedCore placing discrete orders. Lucas: Exactly. Under VMI, MedCore shares its rolling twelve-week forecast and daily consumption data with the supplier. The supplier then manages a consignment stock at MedCore's facility — or at a nearby third-party warehouse — and replenishes based on actual usage, not purchase orders. Luna: And MedCore only pays when they pull the material off the shelf. That's a working capital win. Lucas: It is. They calculated that their inventory carrying costs dropped by twenty-two percent in the first year. But the real prize was the lead-time compression. Instead of waiting eight to ten weeks for an order to be manufactured and shipped, the supplier already had the stock positioned. So the replenishment cycle went from weeks to days. Luna: But I imagine the suppliers didn't just say 'sure, we'll carry your inventory for free.' What did MedCore offer them? Lucas: That's the key question. MedCore used what's called a gain-share model. They agreed to split the savings from the lead-time reduction and the lower inventory costs. Specifically, for every week of lead time eliminated, MedCore shared twenty percent of the production cost savings with the supplier. So if a part cost ten dollars and they saved two dollars per unit, the supplier got forty cents. Luna: Doesn't sound huge per unit, but if you're talking thousands of units, it adds up. Lucas: It does. And the suppliers also got longer-term volume commitments. MedCore signed three-year agreements with guaranteed minimum volumes, which gave the suppliers the confidence to invest in the extra inventory and the data-sharing system. Luna: What about the data-sharing piece? That's often the friction point. Lucas: MedCore had to build a simple portal where suppliers could see the forecast and the daily consumption numbers. They used an off-the-shelf supplier collaboration platform — nothing custom. The suppliers log in, see the current stock level at MedCore's dock, and decide when to ship the next batch. MedCore also required suppliers to maintain a minimum buffer of two weeks of forecasted demand. Luna: So the suppliers carry that buffer on their balance sheet. That's a real shift in who holds the risk. Lucas: It is, and it's why not every supplier agreed. MedCore approached eight suppliers. Six signed on. The two that declined were smaller family-owned businesses that didn't have the cash flow or the forecasting confidence to carry that buffer. MedCore kept them on the traditional purchase-order model. Luna: That's a good point — VMI isn't a one-size-fits-all. What happened in the first three months? Any surprises? Lucas: One big surprise. Three months in, demand for a specific polymer component spiked by forty percent over forecast because of an unexpected maintenance cycle at the hospital network. The supplier's buffer was exhausted in ten days. MedCore's production line almost stopped. Luna: So the system broke. How did they fix it? Lucas: They added a dynamic threshold. Instead of a fixed two-week buffer, the buffer became a percentage of the forecast error. So if the forecast error for a given part was high — say, twenty percent — the buffer was set to three weeks instead of two. They also set up an escalation protocol: if consumption exceeded forecast by more than fifteen percent for three consecutive days, the supplier got an alert and had to airfreight a shipment within forty-eight hours. Luna: Airfreight costs eat into the gain-share savings though. Lucas: They do, but MedCore and the supplier agreed to split the airfreight cost fifty-fifty — and only if the spike was outside a mutually agreed band. That gave both sides an incentive to improve forecast accuracy. Over the next six months, the number of airfreight events dropped to almost zero. Luna: What about the overall results? Twelve months in, what did they measure? Lucas: Lead times for the six VMI parts averaged seven weeks, down from twelve. Inventory turns for those parts improved from four times a year to eleven. MedCore's total inventory value dropped by about three million dollars. And the suppliers, on average, increased their revenue from MedCore by eighteen percent, because the volume commitments and the reliability of the relationship led to more business. Luna: So it was a genuine win-win. Do you think this model could work for a smaller buyer, say a fifty-person manufacturing company? Lucas: I think so, but you'd need to start small. Pick two or three suppliers who already have good data-sharing capability and a relationship of trust. Start with one part family, maybe a high-volume stable-demand item. Prove the concept, share the savings transparently, and then expand. The data infrastructure doesn't need to be expensive — a shared spreadsheet can work in the beginning, though a basic portal is better. Luna: And the gain-share clause is probably the linchpin. Without a clear financial incentive for the supplier, VMI is just pushing inventory onto their balance sheet. Lucas: Exactly. And that's where the negotiation craft comes in. You're not asking the supplier to do you a favour — you're offering them a slice of a bigger pie. Luna: I like that framing. It's a partnership move, not a cost-cutting move. Lucas: Which is actually the spirit behind why we do this show. We keep these episodes free and ad-free because we believe better procurement conversations should be accessible to anyone who wants to learn. If these conversations have moved your work forward in some small way, and you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep the lights on and keep this resource open. No pressure. Lucas: Right. Back to MedCore — one more interesting detail. After the first year, they extended VMI to a kitting supplier who manages sub-assemblies. That cut their assembly line changeover time by thirty percent. So the model has legs beyond just raw materials. Luna: That's a great point. VMI can scale across different tiers of the supply chain. Lucas: It can. And I think the takeaway is this: you don't need to be Walmart to make vendor-managed inventory work. You need a clear metric like lead time, a willing partner, and a gain-share structure that makes the deal fair. MedCore showed it's possible with six suppliers and a shared spreadsheet. Luna: Fair point. And if any of our listeners have tried a similar approach, we'd love to hear about it. Lucas: Absolutely. That's it for this episode. Thanks for listening.