Wednesday, March 13, 2024

March 2024: Vendor Managed Inventories, (V.M.I.): "How to Play the Game"

Since the early to mid 90's, many of us have gotten used to working with the Manufacturers' Vendor Managed Inventory, (V.M.I.). Prior to the V.M.I. Introduction, Parts Managers like myself relied totally on our own Dealer Management System, (D.M.S.) to run our Daily and/or Weekly Stock Orders.

Fast forward to today, and if your manufacturer offers their own V.M.I., we are now subjected to these Manufacturers recommendations on just what parts we should stock. Even though these V.M.I. Programs do utilize individual dealers' sales information as well as the dealers recommended Stocking Levels as set up on the D.M.S.

In this issue of ACG "Smart Parts", we are going to drill down and break down just how these V.M.I. Programs work and more importantly, "How to Play the Game" in getting more of the rewards from these programs with less risk.

Even if your manufacturer does not offer a V.M.I. just yet, don't be surprised if they do in the near future as many manufacturers are joining in such as VW, BMW, Ford just to name a few. Software Programs such as RIM, ARO, Partseye, SRD, and others are now the tools manufacturers are using to create their Stock Replenishment Programs.

Even though the individual manufacturers set ups and qualifications may be different, they may use the same "vehicle". For example, RIM is not just a GM Sponsored V.M.I. as Ford, VW, Mitsubishi and Nissan and others have their own versions of the same software used in RIM, (Retail Inventory Management).

There are also some V.M.I. Programs that are better than others such as PartsEye and FCA's ARO Programs. It all comes down to how they are set up initially as well as program qualifications, benefits, penalty's, guidelines and one of my favorites which is "compliance", which I actually call "obedience".

Another great selling point for these programs is the word "protection" or "inventory guaranty", as both of these terms are deceiving. If these programs offer this protection, or guaranty, then why are there still many of these "qualified" program parts still on the shelves at dealers several years later? Where is the protection, or where is the inventory guaranty?

The truth is all these V.M.I. programs include a "Return Policy", and not "Protection" or "Guaranty" Return Policy. All return parts include restrictions, guidelines, criteria and return qualifications just like any other Manufacturers Return Policies, whether regular monthly returns, or V.M.I. returns.

Let's get started on how these V.M.I. Programs work....

Creating the software V.M.I. "vehicle" such as RIM for example all starts with the collection of sales data from the dealers Dealer Management Systems, (D.M.S.). Some V.M.I.'s will also collect "total demand" data which includes Lost Sales Reporting.

This demand data is collected from dealers nationally, regionally, demographically and weighed utilizing algorithms to measure and initiate parts "phase-in" as a group. The next step, which varies from manufacturers and V.M.I., is what will "trigger" the initial parts "proposal", or recommended Best Stocking Level, (BSL).

In most V.M.I.'s, it only takes one sale in either 12 or 24 months on a "qualified" V.M.I. part that has met overall "group" phase-in criteria. For example, normal individual dealer parts phase-in criteria may be "at least 1 demand in 3 separate months over a period of 7 months to phase-in".

Group phase-in follows these same guidelines in the above example except "multiplied" by several dealers' total demand. So, instead of "at least 1 demand in 3 separate months over a period of 7 months", the demand may have to be "143 demands in 3 separate months over a period of 7 months".

Then, after "qualifying", parts are then weighted for average daily demand through algorithms and is called "Weighted Daily Demand", (WDD), or even "Cycle Demand" and "Lead Time Demand" algorithms.

This all sounds pretty complicated, but it really isn't and the problem with all this is that technically, a part may qualify with those 143 demands in the group as listed above, without any demand in my dealership. 

In other words, when we do finally sell just 1 of these "qualified" parts, the V.M.I. will recommend stocking that part after just 1 sale in either 12 or 24 months. So, then the next question would be..."Should we stock a part that we've only sold once in 12 or 24 months, and will it really be protected?"

The above example can also go in the other direction on a part that has met my criteria for phase-in with several "hits" but is still not a "qualified" V.M.I. part because it hasn't met the total group demand criteria. This is why we still need our own D.M.S. to track our own demand.

Let's now look at "The Good, The Bad, & The Ugly" on these V.M.I. Programs

First, The Good:

It's always been a good thing to see what parts are selling out there to get a good sense of what we may be selling in the future. Collective demand information will give us a "road map" for sure, but demand varies from dealership to dealership and may lead to understocking or overstocking and obsolescence.

Discounts and Allowances is also a good thing as these V.M.I. Purchase help us earn discounts and build return reserve. Depending on the manufacturer, additional "back end" money may be available as these programs may also be tied into overall dealer "cash back" programs.

Second, The Bad:

One of the first "bad things" that I see quite often due to these programs is that many Parts Managers rely on these programs 100% for all their Stock Replenishment. What they may not realize is that most of these V.M.I. Programs offered by the manufacturer only provide approximately 50%-55% of their total manufacturer parts inventory "breadth".

In other words, they cover mainly the A and B type parts and miss a lot of what I call the "meaty parts" like some sensors, gaskets, bolts, tensioners, adjusters and so on. Many of the parts that are tying up the Service Department and slowing down Service "Cycle Times".

These "meaty parts" can only be picked up by our own D.M.S. with the Proper Set Ups & Controls and running our In-House Stock Orders like we did before these V.M.I.'s were even out there. Unfortunately, many Parts Managers have transformed away from their own D.M.S. and are missing the benefits of their own D.M.S. with the right set ups & math.

Lastly, The Ugly:

The Ugly side of many of these Manufacturer V.M.I. Programs is unfortunately the lack of understanding of how these programs work and "How to Play the Game". The results of not knowing how to play the game leads to a lot of overstocking of these V.M.I. parts and more obsolescence.

Overstocking in the ways of maybe having too many Days Supply of even faster moving parts, i.e. having 10 Brake Rotors of a part number when we only need 4. Overstocking doesn't just mean having too many of a fast-moving part as having just 1 of a part number that I don't sell could be too many.

In many of the stores that I have visited, the overstock of V.M.I. parts are as much as 10%-15% of the total parts inventory. All the while, that additional investment on overstocking investment could be directed more towards parts that will strengthen the "breadth" of our parts inventory to increase overall "First Time Off Shelf Fill Rates".

Another "Ugly" is that many of these dealers that utilize a Manufacturers V.M.I. Program is increased obsolescence. Even though these programs promise "Inventory Protection", that is just not the case as I've witnessed over and over again.

Although, there are a couple of these V.M.I. Programs, such as PartsEye that actually "discourage" the stocking of Aged V.M.I. Parts, which is great. Maintaining the proper level of Days Supply and Aged V.M.I. Inventory is encouraged and rewarded with more Program Benefits.

Unfortunately, in some other Manufacturer V.M.I. Programs, dealers are being led to being the Manufacturers Second Warehouse and admittedly so from some of my conversations with some manufacturers.

Knowing "How to Play the Game" also requires knowledge of "Riding the Curve". Compliance Levels require the Parts Manager to know what to stock and what not to stock in these programs that lead to overstocking and accruing more obsolescence while staying "Compliant", or "Obedient" to these Programs.

Knowing "How to Play the Game" is a "juggling act", and we need to take advantage of the benefits while protecting our dealers second highest asset, which is the Parts Inventory.

If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @, or...just pick up the phone and call me at :

(786) 521 - 1720...After all, not knowing is not worth not "fixing" it...