VMI: The Game Changer
Vendor managed inventories are here to stay, and the growers embracing VMIs are the ones succeeding.
January 24, 2010
Vendor managed inventories (VMI), or ” pay by scan” as we more commonly know it, has changed the way growers do business – both large and small – resulting in both success and failures. In trying to determine why some fared better than others, I spent a lot of time in retail gardens centers and talked to a number of growers who are heavily involved in VMI.
The major elements that affect the management were discovered to be the following:
• A positive mindset that looks at VMI as an opportunity
• Analyzing the sell-through data to drive inventory decisions
• Controlling discards
• Product quality – just a “ticket to play”
When pay by scan was first introduced, many were fearful of their potential to be profitable under the system. Pay by scan caused a lot of dissent and negative conversations throughout the industry. There were the few who adopted the mindset of “the customer is in charge and we have two choices – find another customer or figure out how to make this work for our business and the customer.“ This group immediately started planning and analyzing what it would take to be successful, and they are now realizing the fruits of their efforts.
Knowing the numbers is more important than ever regardless of what system a grower is working under. The national retailers all supply their vendors with access to retail data and those who employ analysts to interpret that data have a clear competitive advantage. As these retailers move to an enhanced SKU management system that will provide genera and variety detail, analysis will be even more powerful in allocating inventories of SKUs by store.
One of the most challenging elements of VMI is the vendor is accountable for products that are not sold. No longer can a vendor put together store orders by guessing or looking only at historical data. Discards will be controlled by analyzing the data by stores and by SKU at each store. I recently heard of a grower who has developed software that does this analysis and spits out store orders based on a number of indices, including weather patterns.
As with anything, product quality is in the eye of the beholder and the beholder for this industry is the consumer. Research has shown two of the key elements for consumer-buying decisions are plant look and plant size. Although plant quality is important, it is merely a “ticket to play” and is an integral part for managing VMI successfully and profitably. In all my travels, it is evident high-performing vendors stock the shelves with high-quality goods. What looks great in a greenhouse does not always looks great at retail.
Distribution is one of the highest cost processes driven by rising fuel prices, more frequent deliveries, larger product sizes and the growing need for distribution carts. As we move toward more category management, contract growers are cross-docking with primary vendors, which leads to increased distribution costs. Some growers are now managing all green goods categories. That has driven up their sales revenue but at the same time increased the complexity of managing their business. Distribution will undergo more changes in the next five years with more creative solutions, and more growers will work together to control these escalating costs.
VMI essentially made the grower a retailer and created a whole new learning curve that enables the grower to understand how the retail environment really works. One of the most positive aspects of VMI is the grower must now know more about consumers and their buying motivation than ever before. Those who took merchandising seriously and created a well-managed operating group fared the best, while those who did not recognize the impact of poor merchandising were seriously challenged and suffered some severe performance issues. They have moved on to other customers.
While assuming accountability for discards, there has been a decline in innovative new products and product forms because of the fear of controlling discards. Lack of innovation has led to a decline in gross margins, while at the same time opening up the innovation to breeders and other brand owners who now control many of the new product introductions.
At Home Depot, most of the new products are coming from the Viva brand and Proven Winners. The vendors are now obligated to offer these programs because of a lack of innovation from the vendor base.
VMI has clearly changed how the grower goes to market while providing many opportunities, with the most significant being the ability to mange garden centers and get closer to the consumer. It has changed the buying habits of many and has made the importance of satisfying consumers a more important priority. No longer do growers just adopt new varieties because they personally like something. The decision is now more driven by consumer performance, not just production issues.
Breeders can no longer introduce varieties based on the old adage of “early, compact and basal branching.” Now, growers think about sell-through, sales velocity and discards. VMI has been one of the major contributors to the reductions of input costs, while at the same time putting more emphasis on consumer satisfaction.
VMI has also created an expanded segment of “contract growers” that is currently growing at an unprecedented pace and is creating a lot of opportunities for small and midsize wholesale growers. VMI has created higher levels of accountability, the opportunity for the industry to get connected to the consumer and drops the production-only mentality. We are now in an era of “retailer in charge,” moving quickly to an era of “consumer in charge.”
Jerry Montgomery operates Montgomery Consulting Services and can be contacted at 407-808-4077 or firstname.lastname@example.org.