The Risks Of Managing Inventory For Customers

The fourth and final part of this article details the risks distributors assume with VMI.

Managing inventory is tricky. There is typically significant risk for end users. If they order too much of something they don’t need, they’re stuck with it.

With VMI, however, that risk is pushed onto the distributor, says Truitt. That’s not necessarily an issue with items regularly used by the end user, but it can be an issue for custom-ordered products.

“When we bring in these custom items for our customer, we typically have them sign off on the fact that they agreed to take it if something goes south, whether they change suppliers or they don’t need the product anymore,” says Truitt. “But the reality is you own it. You paid for it. You haven’t invoiced them for it. And these agreements? They’re certainly not going to be held up in court if it ever went to that.”

Truitt would love to invoice the customer right away after the order is placed, but his competition doesn’t do it that way, so neither can he.

“The end users know it,” he says, “and they take advantage of it.”

One way Sikes Paper tries to mitigate that risk is by tying it to the sales rep who made the order. If the sales rep takes an order and the customer refuses to pay for the item, the sales rep has to eat a portion of the cost. Truitt typically gives the sales rep 90 days to try and move the item before docking his or her pay. This rule gives the sales rep an incentive to make smart ordering decisions.

“We’re all sharing in the financial pain,” says Truitt. “In those situations, we’re certainly going to practice the old adage, ‘We win together, we lose together.’”

There aren’t many other scenarios that might doom a VMI relationship. VMI isn’t a great fit for customers that have multiple storerooms instead of one centrally located supply closet, because it would be difficult for distributor sales reps to efficiently count those customers’ inventory. Likewise, large building service contractors with multiple locations tend to employ regional managers that track inventory, making VMI unnecessary, says Truitt.

New management at an end user could always change the status quo, as well. Additionally, communication is always key when special orders are needed. And, of course, the sales rep can’t necessarily go on a month-long vacation without proper planning, since the inventory needs to be counted regularly.

“Short of that, it’s a fairly simple thing,” says Hestenes. “And simple works.”