F U E L I N G B E T T E R D E C I S I O N S
Vendor-Managed Inventory:
Using Trust, Information and Relationships
to Improve Operational Efficiency
John Lee, Chief Executive Officer
WorldTelemetry, Inc.
Abstract
Companies that purchase fuels, chemicals,
solvents and other products often have to
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make a choice: either reduce costs by keep-
ing inventory levels low, risking run-outs
and lost sales, or keep enough surplus inven-
tories on hand to be prepared for unforeseen
spikes in product demand, which tends to
drive up inventory costs and market price
risks.
Vendor-managed inventory is a system by
page which the distributor (seller) of products
(e.g. fuels) monitors and manages a custom-
er’s (buyer’s) inventory levels, oftenthrough
a system of automated data collection and
analysis. When product inventories drop
below a specified level, the distributor
dispatches a delivery based on previously
agreed-upon criteria.
By utilizing VMI, buyers are able to have
the inventory available as soon as the need
arises, without incurring the costs and risks
of keeping a large surplus on hand. Buyers
are assured of a reliable supply of product
while avoiding higher than necessary inven-
tories and the associated cost of capital.
VMI fosters lasting relationships between
distributors and customers through the effec-
tive use of technology.
W H I T E P A P E R
Introduction
Innovative companies fail regularly. Why?
Often the people who create the best prod-
ucts have little idea of how to operate an
efficient business. Their companies struggle
through high- interest loans and demanding
investors, then are often bought or go bank-
rupt, their origins relegated to the footnotes
of business school textbooks.
Yet some survive. Some become global com-
panies, and are seen as industry leaders who
push convention. What enabled these com-
panies to not only survive, but to lead?
Financial Planning. Efficiency. Well-man-
aged operations.
While the charismatic leaders of these com-
panies may not get an adrenaline rush from
reducing inventory lead-time from six weeks
to two, there are those within who do. These
are the process visionaries; they are the
people who pushed the assembly line, bar
coding and electronic data interchange well
before the internet boom.
So what happened after the millennium,
when fuel prices began to skyrocket, becom-
ing a significant threat to profitability? Some
buyers strove to reduce costs by keeping
 F U E L I N G B E T T E R
inventory levels low, risking run-outs and lost
sales. Others chose to keep enough surplus
inventories on hand to be prepared for supply
disruptions or unforeseen spikes in product
demand, thereby increasing inventory costs
and market price risks.
A few operations pioneers, however, saw new
automated tank monitoring technology and
business intelligence software and found a bet-
ter solution: Vendor Managed Inventory.
Extending The Boundaries
Vendor Managed Inventory (VMI) is a system
by which the distributor (seller) of products
(e.g. fuels) monitors and manages a custom-
2
er’s (buyer’s) inventory levels. When product
inventories drop below a specified level, the
distributor dispatches a delivery to replen-
ish them based on previously agreed criteria
between the distributor and customer.
In essence, VMI constitutes the transfer of an
internal overhead process (fuel inventory man-
agement) to a company for whom this same
page
process is viewed as mission critical. The
focus, the expertise, the capital that these sup-
pliers devote to their work tends to be much
higher than that associated with overhead.
A typical fuel VMI relationship is depicted
below:
BUYER
Fuel
Tank
VENDOR
(Fuel Supplier)
Data
Remote Data
Aggregation
Collection
and Analysis
Resupply
D E C I S I O N S
VMI blurs the barrier between companies by
extending the scope of each company’s in-
ventory management process. Rather than a
handoff of the order, there is an overlap. This
overlap is comprised of a service level agree-
ment and shared data.
The result is that buyer’s role has gone from
low-level operations management to one fo-
cused on performance monitoring and opera-
tional improvement.
How VMI Works With Fuel
Inventory Management
The basic principles of VMI work the same for
fuel inventory as they do for discrete prod-
ucts. However, storage issues, compliance,
safety, as well as the constantly varying price
of inventory all impact fuel replenishment in
ways that discrete goods industries seldom
experience.
For instance, the basic measuring process for
fuels is different. There is no counting, bar
coding or scanning at the register. Someone,
or something, must periodically measure the
tanks. Usually, the supplier uses automated
tank monitoring equipment to monitor inven-
tory levels and feeds this to a business intel-
ligence application to optimize deliveries.
Data Fuel Mgmt
Strategy
Analysis
PO / Service Level Agreement
Inventory
Information Strategic Fuel
Data Inventory
Analysis Performance
Fuel
Logistics
 F U E L I N G B E T T E R
The Commodity Concern
One major difference between a typical VMI
relationship and a fuel, chemical or resin rela-
tionship is the variable price of the product.
To use the simple example of oil: prices
change daily, often by dollars per barrel.
Futures prices vary also. Both the distributor
and the buyer of fuel have a desire to reduce
excess inventory, ensure adequate resupply
and pay the least amount for the oil. Hedging
becomes a factor. Long term forecasts of de-
mand and commodities’ prices become factors.
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This added complexity has increased the levels
of VMI services available for fuel. A buyer
could negotiate fuel prices and the distributor
would monitor and replenish the fuel, pass-
ing on the customer’s negotiated price. Or,
a full-service approach might include price
research and negotiation, market analysis, tank
monitoring, order fulfillment and distribution,
safety and environmental compliance monitor-
page ing, and management reporting.
Levels of Inventory Management
Pertaining to Fuel
The levels of inventory management can be
divided into four basic levels, some of which
may overlap depending on the implementa-
tion.
• Consulting Model: The vendor provides
information, tools and expertise but the
buyer makes the inventory management
decisions.
• Traditional VMI Model: The supplier
monitors the inventory (either onsite or
externally), makes the resupply deci-
sions and executes deliveries to the
customer.
D E C I S I O N S
• Consignment Model: The supplier man-
ages the inventory as above, but payment
is not made until the product is either
used or sold.
• Outsourced Department Model: The
supplier manages most, if not all, aspects
of fuel purchasing and management.
Documented Advantages
Specifically, advantages to the customer usu-
ally include:
• Reduced management overhead, including
order processing and inventory purchas-
ing. The day-to-day tasks instead become
relationship and capital management.
• Fewer market purchases (sometimes called
‘panics’) which tend to increase purchase
and delivery costs.
• Improved vendor service. A few factors
enable this:
1) Ownership of the process increases
the vendors responsibility;
2) Increased customer usage informa-
tion helps the vendor plan, forecast,
and adjust routes and deliveries as
needed; and
3) The closeness of the relationship and
the investment of the vendor push them
to provide high quality service.
Improved vendor service can lead to:
• Lower inventory costs, which release
working capital for use on other, more
strategic initiatives.
 F U E L I N G B E T T E R
• Reduced run-outs and overfills.
• Increased volume, for both the customer
and supplier. Other factors play into
this, but a cost-effective supply chain
facilitates growth.
If the supplier becomes responsible for pur-
chasing fuel, direct costs may also decrease.
Again, this is a transfer of business focus.
Fuel suppliers and distributors work with
much higher volumes of fuel, which enables
them to buy much larger quantities at lower
prices. Also, because supplier volumes are so
high, pennies matter. More time and money
are invested in tools and expertise specifically
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focused on obtaining fuel at the lowest prices.
Building a Successful VMI
Relationship for Fuel
Implementing a VMI process is not easy. It
may look easy — simply tell the vendor what
to do and make them do it — but that doesn’t
page
work. The vendor may get the job done, but
any sense of teamwork will be shot. In order
for the result to be mutually beneficial, both
parties must work together. Below are a few
critical elements that should be incorporated
into the VMI implementation.
Open Communication and Expectations
VMI implementation is no different than any
software implementation or equipment instal-
lation. The same basic guidelines apply: set
expectations early, clearly define roles and
establish working parameters that are clear and
flexible. An open start sets an honest tone for
the long-term relationship.
Shared Responsibility for the Process
When one party is tasked with the implemen-
D E C I S I O N S
tation and long-term success of the agreement,
the relationship begins imbalanced. VMI is
like a marriage; even when roles are clearly
defined, as they are in VMI, each party must
work.
Clearly Defined Purchasing Parameters
Distributors work with larger volumes of fuel.
They specialize in buying and selling the com-
modity in bulk. This combination requires that
they have the market analysis skill to procure
inventory at the best possible price, can buy in
bulk, and have a large storage capacity.
Usually all exist, and distributors can use their
buying power to obtain better prices than their
customers can. A key for the buyer is to make
sure that the chosen distributor can match, or
hopefully better, the prices and purchase op-
tions of other distributors. Price performance,
such as hedging with panic order handling,
should be built into the contract.
Trust (and Trust Maintenance)
Humans trust — it is an intrinsic social mecha-
nism critical to any relationship. Yet we don’t
like to admit that we need periodic proof of
performance for our trust to be maintained.
We also don’t like to be watched.
Unfortunately, For a VMI relationship to last,
partner monitoring is critical. Recent tech-
nological improvements have automated the
process of fuel inventory monitoring. Telem-
etry equipment measures tank levels at short,
regular intervals. Automatically sending this
data to both the vendor and the supplier can
give each near real-time visibility of usage
and deliveries. If an administrator wants to
verify a delivery, all he needs do is look at his
on-line data and compare the measured inven-
tory inputs and outputs with the delivery report
of the vendor. At the same time, if the buyer
 F U E L I N G B E T T E R D E C I S I O N S

begins to hide inventory or purchase fuel from

third parties outside of the VMI agreement,
the vendor, with full access to the same data,
will know.

This shared access to information is necessary

for long-term trust. The keys are to identify
which information is relevant to your relation-
ship and how that information will be moni-
tored.

Periodic Process Analysis

In order to ensure success, continuous moni-
toring and process improvement are necessary.

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Again, data is key. Since the buyer has freed
itself from the daily operations, it can focus its
efforts on analyzing lead times, overall inven-
tory costs, and continuing improvements. The
vendor, because of their better access to usage
data, can modify their delivery routes or pur-
chase schedules. Both have broader views of
the present, are better able to track historical
data, and can forecast more accurately.
page
Conclusion

Broad analyses of VMI across multiple in-

dustries have shown that it provides marked
operational improvements for all parties in the
supply chain. A system of automatic data col-
lection and analysis is integral in making VMI
the most efficient solution possible for buyers
and sellers. The efficiencies associated with
enabling those with mission-critical focus to
manage inventory replenishment are too great
to ignore. If you as a vendor or buyer have
not yet investigated Vendor Managed Inven-
tory for your company, it is time.