An Italian writer once recounted how, in impoverished post-war Rome, he was getting unusually slow service at a neighborhood restaurant. Then he found out why: The restaurant didn't stock any food. Rather, the chef would wait until the customer ordered a meal and only then would rush out to buy the ingredients.
BlueLinx general manager Richard Goering knows the feeling. "Retailers that I've seen have got the sign up" that a product is available for sale, Goering said at a conference in Baltimore last fall, "and they expect us to have the product there the next morning."
In a time of reduced sales and increased competition, making the distributor your warehouse has become the operating philosophy of dealers and the operating condition of distributors nationwide. "I suspect we've never seen inventories as low as they are now," says Stan Bell, president of Boise Cascade Building Materials Distribution. Like other distributors, Boise has seen an increase in less-than-truckload deliveries and fewer rail-car-sized purchases.
And why not? Dealers say one of the best ways to keep cash from going out the front gate is to limit the volume of materials coming in–particularly if a distributor hungry for business can deliver goods within 24 hours of getting the request.
Now dealers are taking reduced inventories a step further by, in effect, never purchasing the goods until the moment they need them. The practice goes by many names, particularly vendor-managed inventory (VMI), vendor-owned inventory, and consignment sales. The terms can vary slightly, but the essentials remain the same: a distributor or manufacturer agrees to stock product at a dealer's site, but the distributor/vendor continues to own those goods. The dealer doesn't take ownership of the stuff until the moment one of its customers orders the goods.
This isn't a new concept. Some of VMI's biggest proponents, such as Tindell's in Knoxville, Tenn., and Chinook Lumber in Monroe, Wash., have been doing it for years. But dealers, distributors and consultants nationwide said they have noticed a sharp rise in use of, or at least interest in, VMI–often to distributors' dismay.
"Yes, we're being asked, and we're not doing it," declared Bob Lattanzi, northern division regional manager for Hattiesburg, Miss.-based Hood Distribution. "This issue came up about a year ago, and we decided no," added Boston Cedar's Scott Babbitt, who took part in the same panel discussion in Baltimore as Lattanzi and Goering. "We haven't wavered from that, and I don't expect that we will."
Getting Picky. Many other distributors say they discourage dealers when the subject comes up. But several of them ultimately will admit that they have agreed to select VMI deals, and dealers say that often it's the distributors' reps who raise the issue.
Chris Rader can understand why. "The vendor is assured the sale of the product, usually at a predetermined price," notes Rader, president of Rader Solutions, a consultancy in Lafayette, La. In addition, by agreeing to VMI, the vendor/distributor also increases the odds that its goods will be sold because its product already is in the dealer's yard. "If you have the product in stock–VMI stock–you will not be shopping price," Rader says.
But there are challenges to embracing VMI, most notably the requirement that the dealer must keep accurate track of the vendor's goods while they're in the dealer's yard. Consultant Ruth Kellick-Grubbs says inventory control is so loose at a lot of lumberyards that it's a struggle to get within 5% of the right number, and a high performer still may be 3% off. Multi-yard operations that transfer goods around find it particularly hard to keep count, she notes.
Kellick-Grubbs recommends that dealers pushing for VMI build trust with the vendor by conducting inventories of the product involved every two weeks at first, then monthly, and then quarterly. "As the vendor gets more comfortable with the idea that the dealer can keep track of the inventory, the vendor pulls back," she says.
Several other dealers who have gone big into VMI said they wouldn't have been able to do it before they upgraded their software. To that end, just last month Progressive Solutions rolled out a new module for its bisTrack system devoted specifically to VMI. Chinook, which uses bisTrack, sends a report on sales of VMI goods to its vendors daily. Tindell's, which developed its own software, has set things up so that vendors can track sales of their VMI products online.
Then there's the issue of price. One veteran distributor argues that VMI doesn't make sense for a lot of dealers because of the bookkeeping costs and the need for distributors to price the product higher than if they simply sold the goods to the dealer.
"Somebody's got to carry the cost of that inventory," this distributor says.
Instant Cash. But that hasn't stopped Chinook from moving 20% of its inventory to a VMI arrangement and "we're gunning for 50%," says Joost Douwes, the company's vice president and general manager. "Our motivation was cash," Douwes says. "You turn inventory dollars to cash in an instant that way." He says some suppliers have countered by offering Chinook 60 days to pay for the goods they buy. "But it's not the same," Douwes says. "Seasonality makes prices go up and down. This way there's no fluctuation."
Indeed, going to VMI can alter the relationship a dealer has in both directions along the supply chain. Some dealers count on the extra profits they believe they can make from buying lumber at a low price and then selling it later at a higher rate. But at Tindell's, where most of the company's heavy building materials are under VMI, vice president of purchasing Gene McKinney sends his customers a biweekly newsletter showing market prices for spruce, pine and paneling as well as the cost of a typical framing package in Knoxville. Because of VMI, those prices also are pretty much what Tindell's pays when it ultimately draws on that inventory. If the customer's comfortable that all you're doing is moving the pricing with the market, customers will be more accepting of the price charged, he says.
As for vendors and distributors, embracing VMI tightens the relationship, say dealers.
"It becomes an absolute marriage with the supplier," Douwes says. "...You can never take the same widget and buy it from multiple suppliers. It's a selling feature for us to say 'Mr. Supplier, this guarantees 100% loyalty from us.'" When asked to describe the VMI arrangement for chipboard that Nampa, Idaho's Lloyd Lumber is setting up with BlueLinx, operations manager Scott Jacobsen replies: "It's sort of like dating."
While dealers may vary in the way they see VMI changing their relationship with vendors, VMI definitely alters the relationship with financial reports. At many dealers, the value of the inventory makes up a huge share of the assets side of the balance sheet. When the goods in the yard are vendor-managed, dealers can't count those materials. That's another reason why it's important to have accounting software in place that can keep track of VMI vs. non-VMI goods out on the racks.
McKinney also notes that VMI tends to work best on high-volume, single-product relationships. He says Tindell's has one millwork supplier that provides 50 different products, of which only 10 are sold in sufficient volume to justify VMI. In such a case, Tindell's still would need to make small, occasional orders of the other 40 SKUs, so it makes just as much sense to keep things as they are. Steady deliveries of the top 10 goods help reduce the cost of getting the other 40.
In the long run, then, VMI works when both sides benefit. "We're asked daily about this," Carl McKenzie, director of product management at U.S. Lumber Group, said at the Baltimore conference. "And we do it occasionally. There are places where you have [a strong, long-lasting relationship] and it makes sense. We'll do it if it builds sales."