Are you looking for inventory efficiency and availability in all the wrong places? You may be if you rely on suppliers' consignment inventory programs. In recent years, Steve Vecchiarelli has seen the proliferation of off-site inventory programs, such as consignment stores, that allow companies to pull inventory quickly and conveniently from their suppliers. "They have been around for quite a long time in first-tier companies," states Vecchiarelli, vice president, supply chain solutions, for Digi-Key Corp., an electronics distributor in Thief River Falls, Minn. "The concept is even trickling down to second, third, and even fourth tier companies."

Many companies implement these programs in search of cost savings or for assurance of supply. "Their supply base, which has been stretched thin, has continued to miss delivery schedules," Vecchiarelli observes. However, he believes, these missed deliveries represent the wrong reason to move to these solutions. "Companies believe that they want the comfort of knowing that they have the supplier's inventory in their warehouses, assuring supply while mitigating costs," he notes.

Certainly, there are situations where the concept can work. However, Vecchiarelli has found that most companies rely on it without looking at the internal processes that can help its supply base. "Without looking at these processes, a company exposes itself to perils of supply and demand," he says. A case in point: "When the economy turns down again, as it will because it is always cyclical, suppliers will need to rein in inventory to meet their own metrics." The first place the suppliers look is the isolated pockets of redundant inventory in the field (at customer sites). The suppliers then cut back on the rate and depth of replenishment, and buyers can often end up in worse shape than they were before.

What Vecchiarelli has found makes more sense for Digi-Key is to implement vendor-managed inventory (VMI) with Digi-Key's suppliers that have good logistics control with centralized stores. "These centralized stores allow suppliers more control without underperforming pockets of inventory impacting supplier costs," he explains. "With good logistics, suppliers can provide superior on-time delivery with upside potential and protection against the downside."

This puts the onus on the suppliers to have multiple solutions in place, providing flexibility to customers, rather than requiring them to fit into the "cookie cutter" program.

What's the best way to find the right suppliers for a VMI strategy? Vecchiarelli has found that site visits are useful, as are senior level management meetings with suppliers. "An examination of the supplier's systems in their due diligence is important to understand that they can 'walk the talk' of their presentations," he adds.

As a result of working with these types of suppliers, Digi-Key has seen cycle time reduction, and therefore inventory reduction. "Production throughput has also increased," he adds. "These all drive bottom-line cost reduction, which increase working capital."