Comparing the total cost of goods from traditional distributors to total costs under vendor management

Vendor-managed inventories (VMI) are a great boon for manufacturers-when skillfully implemented-because they provide for lower inventories, lower overall costs, a multitude of risk management advantages, and improved service levels. Far-sighted manufacturers who have adopted VMI see cost savings and service improvements that belie the larger dollar figure shown on each product invoice. As is usual in education, it is quite simple to issue this statement in a classroom and receive nodding heads in response, but it is quite a different situation when those students become purchasing managers themselves and are faced with the choice of paying more money up front under VMI or picking the lowest bid from any competitive supplier of reasonable quality and reputation. Typical business measures put in place to influence purchasing employees' behavior create negative incentives for employing VMI, since paying more money for supplies yields concrete negative numbers, even if the organization as a whole sees a cost reduction that is hidden in other areas of the organization. Conversely, measurements usually create incentives for purchasing managers to pick the lowest bid, even if the company as a whole loses. This project, based on an ongoing study of the electric-utility industry, seeks to construct a solution for communicating the economic realities of separately sourcing materials for manufacturing versus creating a lasting relationship with one primary supplier through VMI. Moreover, the project will attempt to create an "argument" that arms students with knowledge of "total cost of ownership" philosophies, so that they can approach future manufacturing sourcing decisions with clear and convincing "experiential" knowledge. The result will be a clearlydefined economic difference between sourcing methodologies, complete with specific methods of quantifying (in terms of money) many of the benefits of VMI that impact the bottom line, but are not easily converted to a dollar figure.