The use of vendor-managed inventory programs has been rising in recent years as component suppliers and their customers vie to bring their costs under control and gain better visibility into their supply networks.
While not a new concept, VMI has been viewed largely as a way for OEMs and EMS providers to reduce inventory carrying costs in light of the tendency by manufacturers to over-order parts during the industry's last boom. Suppliers have signed on with the rationalization that VMI will allow them to work more closely with their customers to gain a better grasp of demand forecasts.
However, a preliminary study released last week by the Electronics Supply Chain Association reveals that the costs and benefits of VMI are not being distributed equitably across the industry, leading suppliers to assume more of the cost and risk, and reap fewer of the rewards.
The survey of 76 companies revealed that 62% of customers reported a drop in costs through VMI programs, compared with 11% of suppliers. Moreover, only 3% of customers said their costs rose as a result of these programs, while nearly half of all parts vendors said they have incurred additional expense.
This should come as no surprise. When the floor fell out of the networking market in late 1999, manufacturers began to cleanse their stocks. This resulted in huge write-downs as OEMs and EMS companies purged aging inventory. In many instances, products were returned to the supplier base.
Chipmakers in most instances generate higher margins than their distributors and customers, so it's not a stretch to learn that the bulk of VMI costs has fallen to the vendors to manage.
However, the electronics industry's long winter is straining chipmakers. Thus, while it may be preferable to expect IC suppliers to continue shouldering the cost of VMI programs, it may not be possible, and that is why the industry needs to begin a dialogue to explore alternate VMI cost-sharing strategies.
Without such a discussion, suppliers will be left to their own devices. In some cases, they already are. Earlier reports published in EBN revealed that chipmakers in some instances are reining in their distributors' order cancellation and return privileges, and in others are pushing back on OEMs and EMS providers that refuse to share liability for parts they order but don't use.
The industry's runaway growth and subsequent tailspin have created bitter feelings among many. VMI appears to offer a solution to some of that frustration but not in its present form.
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