Washington, D.C. (PRWEB) February 4, 2011 – Procurement and contract expert Stephen R. Guth is now represented by The TASA Group, a leading provider of expert witnesses to the legal profession. Founded in 1956, The TASA Group provides superior, independent testifying experts within the fields of technology and business, and was recently voted as the “Best Expert Witness Provider” by readers of the New York Law Journal.

Guth has over fifteen-years of procurement and contracting experience representing large, multinational companies. He is an expert in procurement, contract law, and contract interpretation in a variety of spend categories with an emphasis in information technology and hotel contracting. He is a licensed attorney in the District of Columbia and Virginia. Guth is a graduate of the University of Miami School of Law (J.D.), University of Maryland University College (M.S., Procurement and Contract Management), and Saint Leo University (B.A., summa cum laude). He holds numerous professional certifications, including Certified Professional in Supply Management, Certified Commercial Contract Manager, Certified Purchasing Manager, and Certified Technology Procurement Executive. Guth has taught graduate-level procurement courses at the University of Maryland University College.

Guth is also a frequent speaker at procurement and contracting industry events and has published numerous books on the subjects, including: “The Contract Negotiation Handbook: An Indispensable Guide for Contract Professionals,” “The Vendor Management Office: Unleashing the Power of Strategic Sourcing,” “Hotel Contract Negotiation Tips, Tricks, and Traps,” and “Project Procurement Management: A Guide to Structured Procurements.” Guth’s books are available on Amazon.com or can be found at Guth’s blog, www.vmo-blog.com, which covers a wide variety of sourcing, procurement, negotiation, and contracting topics.

Guth can be booked as an expert witness through The TASA Group online at www.tasanet.com, through a referral specialist by phone at 800-523-2319, or by email at experts@tasanet.com.

Washington, D.C. (PRWEB) January 11, 2011 — In his most recent book, author Stephen R. Guth provides a unique insider’s perspective on the high-stakes complexities of hotel contract negotiations.

In “Hotel Contract Negotiation Tips, Tricks, and Traps,” Guth exposes real-life hotel contract negotiation tactics and ploys in the form of a practical, easy-to-understand handbook that can be used by novices and seasoned industry professionals alike.  Covering topics from attrition to force majeure to walked guests, Guth dissects hotel contract provisions and provides alternate contract language to counter hotel negotiation ploys.  Says Guth, “When negotiating hotel deals, the focus is on dates, rates, and space—and not on the fine print of the contract.  Until something goes wrong.  Then, the hotel contract and the legalese quickly become all-important.”

Based on years of practical experience, the contract negotiation tactics described in Guth’s latest book could save a group tens of thousands of dollars on its next meeting and could protect a group from being hit with even more in liquidated damages.  Guth explains the risks, “Hoteliers are worried about yield management first and groups second.  If heads in beds or other revenue from your group doesn’t materialize, some hotels won’t think twice about hitting you with liquidated damages.  The best defense is a strong contract.”

Guth describes his approach in explaining the included Master Hotel Services Agreement contract template that can also be downloaded from his blog at no charge, “I deconstruct the Master Hotel Services Agreement section-by-section and provision-by-provision, describing and explaining any tips, tricks, or traps.  This book isn’t an academic treatise on hotel contract negotiations—it’s a practical, how-to guide.”

Whether you are a meeting planner, ten-percenter, or just someone who is looking to get a great deal for your next group meeting, this book has something for you.

This latest book by Guth is currently available at Lulu.com and will be available at Amazon.com.  Guth is also the author of “The Contract Negotiation Handbook: An Indispensable Guide for Contract Professionals ,” “The Vendor Management Office: Unleashing the Power of Strategic Sourcing ,” and “Project Procurement Management: A Guide to Structured Procurements .”

Stephen R. Guth, Esq. is the Vice President of Vendor and Legal Services at the National Rural Electric Cooperative Association headquartered in Arlington, Virginia.  He has provided negotiation services, as both a buyer and seller, to numerous multinational companies.  Guth is a graduate of the University of Miami School of Law, the University of Maryland University College, and Saint Leo University.  He is a Certified Commercial Contract Manager, Certified Purchasing Manager, Certified Professional in Supply Management, and Certified Technology Procurement Executive.

Click here for an excerpt from the book.

While I'd like to think I'm a consummate contract drafter and can whip out any old whereas, heretofore, or notwithstanding I might need at a moment's notice, I actually rely (a lot) on what people have drafted in the past.  Unfortunately, some folks don't like to share and getting my hands on contracts to use as examples hasn't always been easy.  Well, the folks at the University of Missouri - Columbia like to share.  One of my staff recently turned me on to the CORI K-Base which makes searching for old contracts (mostly from EDGAR) super easy.  Check it out, it's free!

Many thanks to Rebecca Mordas, Associate Corporate Counsel, National Rural Electric Cooperative Association, who contributed this article.

Breaking Up is Hard to Do

Scenario:  As a procurement pro, things were going great—you negotiated a contract with a reputable vendor with favorable pricing and some attractive terms.  You thought you would be with this vendor for the long haul and, because of the rosy prospects, perhaps agreed to some contract terms you normally wouldn’t.  Unfortunately, bad things happen to good people, and you’d now like to part ways with the vendor.  Realizing that the relationship is no longer desirable, you recognize that the contract needs to be terminated and initiate a conversation with your soon to be ex-vendor, doing the old “it’s not you, it’s me” song and dance.  You feel relieved that the conversation is over and the termination is out in the open— until you recall that the contract contained provisions which survive the termination of the contract.  Oops.  Here’s your dilemma: how can you secure a clean break from the vendor without those surviving provisions coming back to haunt you?

Answer:  Although the law may vary within the particular jurisdiction you’re in, you should consider drafting and having both you and the vendor agree to a robust termination agreement releasing both parties of all future obligations under the initial agreement.  Language pertaining to the contractual release should identify the contract you’re terminating with reference to the commencement and termination date and even the attachment of the initial contract as an exhibit.  If there has been some partial performance of the contract, the termination letter should reference this work as well as document any payments made pursuant to that performance.

It’s then important to describe any continuing obligations the parties may have toward each other in the termination agreement.  For instance, if a confidentiality provision was contained within the initial contract and not as a separate agreement, you may consider it desirable to ensure there remains a confidentiality agreement between the parties.  The termination agreement must then maintain that those referenced obligations are the only remaining obligations of the party to the referenced initial contract.  Following these referenced obligations, your termination agreement should maintain that, in the event of a conflict between the termination agreement and the initial contract, the terms of the termination agreement shall govern and the conflicting terms shall have no effect.

As for the magic words to use when encountered with the scenario referenced above, it appears that both “rescission” and “release” may be technically correct, however “release” appears to accomplish your goal of eliminating those pesky surviving provisions.  The term “rescission” is a term used by lawyers, courts and businessmen in many different ways.  Under the Uniform Commercial Code, if applicable to your set of facts, a “rescission” refers to a mutual decision to discharge all remaining duties of performance.  It is unclear, however, as to whether the word “rescind” on its own would accomplish a clean drama-free break up.    On the other hand, a “release” refers to the act of giving up a right or claim, and can be more or less described as a “bargained-for” settlement providing more certainty to your concern.  For absolute confidence that the relationship is dead and over, the following language or a variation of it may do the trick: “both parties mutually release, cancel, forgive and discharge each other from all actions, claims, damages, demands, and obligations.”Note that the term “void” would not be an appropriate term as it would technically assert that the provisions were never effective.  This, however, we all know to be untrue, because there was a time period in which the provisions were in force.

Keep in mind that the decision to end the relationship may not be a mutual feeling.  In the event that your soon-to-be ex-vendor doesn’t want to terminate, you may have to be creative in crafting a workable release.  Note that this may mean parting with “valuable consideration” (i.e., some money) in exchange for a release of all future claims.

The article above should not be interpreted as legal advice.  Readers are encouraged to speak with their legal advisor to determine appropriate actions when terminating contracts. 

 

There was a recent and interesting article describing the demand (and corresponding talent shortage) of supply management professionals on CNNMoney.com.  The article cites a survey by the National Association of Colleges and Employers which finds that 48% of U.S. companies plan on hiring supply chain grads in 2011.  The article also includes a link to an MIT study (which you can download here) that describes the talent shortage.  Hey, do I smell a raise?

A question frequently arises when a supply management pro is considering supplier consolidation: Are there any benchmarks or guidelines on how much I can save by undertaking supplier consolidation?

It’s an important question, because it’s frequently necessary to provide estimates of savings when building a business case for supplier consolidation.

By the way, the new lingo for supplier consolidation is “supplier rationalization.”  Supplier consolidation, by the very nature of the term, requires a reduction in suppliers.  Supplier rationalization, on the other hand, doesn’t require a reduction—instead, it means that you have the right mix of suppliers.  I think it’s more about being politically correct than anything else.  Sort of like using “right-sizing” instead of “down-sizing.”  So, for purposes of my explanation here and because I’m not always politically correct, I’ll just call it what it really is: supplier consolidation.

Back to the question…  While there’s a fair amount of supplier consolidation pseudo-benchmarks floating around the Internet, the answer is that you’re going to have to figure it out yourself.  The reason is that the question is extremely fact-specific...

First, what do you mean by savings?  The definition of “savings” means different things to different people.  Do you mean just the savings from having fewer suppliers to manage?  Do you mean those savings plus the savings that you’ll get through better pricing from the remaining suppliers (who should offer you better discounts because of the “same size pie, bigger pieces” result of supplier consolidation)?  Do you mean those savings that you’ll get because you can, as a result of supplier consolidation, focus on more strategic procurements where you can negotiate greater savings?

Second, what’s your spend mix?  Meaning, how much direct versus indirect?  What categories of spend?  Direct spend will arguably save more because there are more costs involved (e.g., logistics costs).  Certain categories of spend affect savings—I’m likely going to save more by reducing the number of suppliers providing hazmat (think MSDS) than I would from suppliers providing courier services.

Third, and speaking of political correctness, what’s included in your possible areas for saving?  If you’re in procurement, do you really want to guesstimate what the A/P savings will be based on pseudo-benchmarks?  Your A/P manager will hate you if you suggest some unachievable guesstimates in your business case...

Fourth, what are you really going to save?  Many pseudo-benchmarks assume that you will be able to reduce headcount and systems costs.  Are you going to be able to RIF some procurement or other support staff?  Maybe.  If you have Oracle iProcurement, are you really going to achieve lower system costs by having a smaller pool of suppliers?  I don’t think so.

Finally, what are the risks / costs you’re going to introduce as a result of supplier consolidation that will affect savings?  If you reduce your number of suppliers, are you going to spend even more time managing them because you’ve become more dependent on your supply base?  Are suppliers going to gig you on price over time because you’ve reduced competitiveness through reducing suppliers?

Unfortunately, you’re on your own in terms of estimating savings for your supplier consolidation business case.  But, if you do some basic research on the Internet, you’ll come across enough material to get you thinking in the right direction.  Just think of all of the possible costs that flow from a supplier relationship—here are but a few:

• RFPs or other types of competitive bids
• Contracts (procurement and / or legal review)
• Purchase orders
• Paying / Reconciling invoices
• Managing suppliers
• Certificates of insurance
• Contract compliance / audit
• W-9 processing
• MSDS / Safety compliance

I’ve created some example formulas for myself that might help get you into the right frame of mind in terms of quantitatively calculating potential cost savings.  If you have any other suggestions that you think might be helpful for others, let me know or post a comment.

• Annual PO cost per supplier = ((Total current year costs of staff generating POs / Total number of supplier POs generated for current year) * (Total number of supplier POs generated for current year / Total number of suppliers with spend for current year)) + (Total current year depreciation and maintenance costs for supporting systems / Total number of suppliers with spend for current year)
• Annual contracting cost per supplier = (Total current year costs of staff contracting with suppliers / Total number of suppliers contracted with during current year) + (Total current year depreciation and maintenance costs for supporting systems / Total number of suppliers contracted with during current year)
• Annual management cost per supplier = (Total current year costs of staff managing suppliers / Total number of suppliers with active contracts) + (Total current year depreciation and maintenance costs for supporting systems / Total number of suppliers with active contracts)
• Annual invoicing cost per supplier = (Total current years costs of accounts payable staff responsible for supplier payments / Total number of invoices paid for current year) * (Total number of invoices paid for current year / Total number of suppliers with spend for current year)) + (Total current year depreciation and maintenance costs for supporting systems / Total number of suppliers with spend for current year)

Scenario:  You had a contract dispute with a vendor regarding their breach.  Your discussions with the vendor didn’t bear fruit.  Unfortunately, you had to threaten litigation and you actually had to file a claim against the vendor which included drafting a complaint, a request for production, and interrogatories.  The vendor finally acknowledged their breach and makes good.  You get a bill from the attorney who your company engaged to go after the vendor.  Who pays for your attorney’s fees?

Answer:  Under the so-called “American Rule,” you could be on the hook for attorney’s fees even though your vendor was at fault and even though it was their foot-dragging that forced you to hire legal counsel.  That is, unless you’ve contracted around the American Rule…

The American Rule isn’t as much a true rule as it is a concept enabled by custom and case law.  The rule is that, unless authorized by statute or otherwise agreed upon in contract, each party to a dispute pays its own attorney fees.  There are other very narrow exceptions to the American Rule, such as bad faith, which eviscerate the rule but that’s not important for discussion here—which is how to be "un-American" by contracting around the American Rule.

The rationale for the American Rule is that potential plaintiffs would arguably be discouraged from seeking legal recourse knowing that they would have to pick up attorney fees for the other party (the defendant) if the plaintiff lost.

So why call it the “American Rule?”  Well, it’s uniquely American.  In contrast to the American Rule, the “English Rule” in the United Kingdom and rules in many other countries award attorney fees and costs to the prevailing party.  The rationale for the English Rule and similar rules is exactly opposite of the American Rule: a litigant (whether bringing a claim or defending a claim) is entitled to legal representation and, if successful, should not be out of pocket by reason of the litigant’s own legal fees.

Parties to a contract who don’t want the American Rule to apply can bind themselves (contractually) to the English Rule by writing into their contract a provision awarding attorney fees to the prevailing party, payable by the losing party.  These provisions are often referred to as “fee shifting” or “attorney fees” provisions.

In a procurement context and from a buyer’s perspective, the question is whether to include an attorney fees provision.  Generally, under a procurement contract, it’s more likely that a vendor will be the subject of a claim or lawsuit (meaning, either as the respondent or defendant) versus the customer.  The reasoning is that a vendor has many obligations of performance under a procurement contract and a customer has a limited number (the main obligation being to pay the vendor).  Thus, more often than not, it makes sense to include an attorney fees provision because the vendor will more likely be on the sharp end of a lawsuit.  Just be mindful that, if the attorney fees provision is mutual—and it most likely will be—the buyer will be on the hook for paying attorney fees if the buyer doesn’t prevail on either a claim brought by the buyer or a claim brought by the vendor.  So, if you have a procurement contract that, for whatever reason, puts you at legal risk as the buyer and has as a good possibility of your being on the losing end of a claim, you might want to reconsider contracting around the American Rule.

Another thing to keep in mind is that a party who makes a claim for breach of contract will not just incur attorney fees.  There are also a multitude of potential “costs” associated with bringing a claim: court costs, fees for filing documents with the court, expert payments for court reporters, witness fees as well as costs of photocopying, printing, postage, telephone, messenger services, and travel

Remember that some jurisdictions have legislated exceptions to the American Rule, so check your jurisdiction.  However, figuring out whether your jurisdiction has an exception or not is made moot by the virtue of your including an attorney fees provision in your contract.

Just to be clear, if your jurisdiction hasn’t legislated an exception to the American Rule and you don’t fall under some other exception (such as bad faith), if an attorney fees provision is not included in your contract, then each party has to bear the cost of paying its  attorney fees and costs.  What this means is, without the attorney fee provision, you could end up having to pay your own attorney fees and costs—even if you win.

Here are some examples of contractual exceptions to the American Rule.  Some contemplate a litigation context and attorney fees only and some are much broader.  The provision I prefer and use is the very last one.  Use at your own risk!

• In any action incurred to enforce this Agreement, the prevailing party shall be entitled to reasonable attorney fees.

• In the event of litigation relating to the subject matter of this Agreement, the non-prevailing party shall reimburse the prevailing party for all reasonable attorney fees and costs resulting therefrom.

• Notwithstanding any other term or condition in this Agreement, in the event either party shall take any action to enforce this Agreement, the non-prevailing party in such action shall pay the prevailing party’s costs and expenses, including but not limited to, such party’s reasonable attorney fees.

• In the event either party shall take any action or institute any proceeding to enforce this Agreement and the terms and conditions agreed to herein, then the non-prevailing party in such action or proceeding shall, in addition to any indemnity obligations under this Agreement, pay the prevailing party’s expenses, including, but not limited to, reasonable attorney fees and costs incidental thereto, which may be suffered by, accrued against or charged to such prevailing party.

• In the event of any litigation arising from or related to this Agreement, including the breach of a party’s duties and/or obligations hereunder, the prevailing party shall be entitled to recover from the non-prevailing party all reasonable costs incurred including court costs, attorney’s fees, and all other related expenses incurred in such litigation. In the event of a no-adjudicative settlement of litigation between the parties or a resolution of a dispute by arbitration, the term “prevailing party” shall be determined by that process.

• In any mediation, arbitration, litigation, or other proceeding, informal or formal, by which one party either seeks to enforce this Agreement or seeks a declaration of any rights or obligations under this Agreement, the non-prevailing party shall pay the prevailing party’s costs and expenses, including but not limited to, reasonable attorney fees.

This article was contributed by Rebecca Mordas, Esq., one of the attorneys in my Corporate Counsel Office.

It is important that both parties negotiating a contract not only contemplate the possibility of a breach, but also define the appropriate remedies available to each prospective non-breaching party in the event of a breach.  This technique will create certainty in your contracts as well as insulate the non-breaching party from spending time and money proving damages in court. In addition, if the contract clearly spells out the consequences of a breach, then each party will be forced to examine the costs of their potential breach before actually breaching.

In negotiating remedies, make sure you put yourself in the shoes of both the breaching and non-breaching party.  Determine in advance what you think would bean appropriate remedy if either you or the other contracting party fails to perform the obligations outlined in the contract.  When limiting damages, be sure you are not giving up too much.  For instance, if a supplier has expressly guaranteed the quality and lifetime expectancy of a particular good, and that particular guarantee is the reason or at least part of the reason that you feel comfortable entering into a contract with that party, do not agree to a contract that excludes express warranties.  (Even better, if you are the purchaser, try to incorporate those particular representations into the contract).

Limiting damages is a common risk management tools that parties agree to all the time.  In order to calculate the risk and protect your company, it is especially important that you not only understand what types of foreseeable risks are likely, but also you understand the contractual language used to limit potential damages.  Below are some terms used in contract law that parties tend to limit or exclude remedies in their contracts:

Consequential.  These damages are those attributable to a breach and are an immediate consequence of a breach.   A consequential damage could include loss profits, diminution of value, or loss of product.  Important concept to note on consequential damages is that whatever the non-breaching party is suffering must have been within the contemplation of the parties at the time the contract was entered into.  For example, if Tom Oto contracts with Farmer John to receive 100 lbs of high grade tomatoes for his special spaghetti sauce business from his farm by first harvest date and Farmer John fails to deliver by this date, Tom Oto can only recover for loss profits on the sale of tomato sauce only if Farmer John knew that Tom Oto was planning to use the tomatoes for his special sauce. Consequential damages can get tricky with showing that the other party knew or had reason to know of a particular use.   

Incidental.  These damages would include any reasonable costs incurred leading up to the breach, like any of the costs incurred for inspection and shipment of the breached goods, as well as the costs incurred by the non-breaching to find replacement goods or any reasonable expenses incurred as a result of a delay in shipment. Incidental damages also include attorney fees.

Liquidated Damages.  These damages are contained in the contract and make life quite simple. They state, in the event of a breach by a party, the breaching party will pay the non-breaching a predetermined amount of money.  These tend to be upheld in court as long as they are not grossly oppressive.  In the example above, it probably would be unfair if Farmer John had to pay Tom Oto a million dollars in liquidated damages if the event of breach.

Specific Performance.  Specific performance would require a breaching party to fulfill its obligations under the contract.  This rarely occurs as courts are hesitant to make parties act.  After all, there is such a thing as an efficient breach—-A breach of contract is sometimes more efficient to breach if the performance of the contract costs exceed the benefits to all the parties. (Disclaimer- I am not recommending or endorsing breaches of contract,just recognizing that the decision to breach is often a business decision made with careful consideration of whether benefits outweigh the cost or vice versa).

Despite your ability to limit remedies, be cognizant that not all remedies may be contractually discharged.  Certain damages, like punitive damages, are equitable remedies awarded by the court cannot be limited by contract.  Other statutorily mandated damages carry strict liability and also cannot be limited through contract. 

Update:  In addition my blog entry below, you may want to check out opinions on the same subject from two gentlemen I have tremendous respect for, Charles Dominick at Next Level Purchasing and Jason Busch at Spend Matters.  Charles' opinion can be found here and Jason's opinion can be found here.

Have you ever been in a situation where a supplier “forgot” to bill you and—out of the blue—you get an invoice from that supplier for goods or services that were provided months and months ago?  It’s particularly painful to get an old invoice from a supplier when you’re already in a new budget year and you haven’t accrued anything for the old invoice.  Surprise!

Arguably, you should have decent enough financial controls to keep this from happening—like reports that show old purchase orders that haven’t been yet matched with an invoice.  That’s a sign that you may not have gotten an invoice from a supplier and you need to pester the supplier to send you one.  But, even with the best financial controls, “old” invoices still have a way of coming back to haunt folks.

So, in the situation described above, what do you do?

Your initial reaction might be, “There’s no way in hell I’m going to pay an invoice from over a year ago!  The supplier can eat it. It’s their fault!”

Well, you’re right, it may be the supplier’s fault but that doesn’t mean that you’re entitled to not pay the invoice.  Generally speaking, a supplier is entitled to recover the value of the goods or services provided, even if an invoice is submitted substantially late.  So, if in fact you really did receive the goods or services, your state law likely requires you to pay up or else.  For example—and without going into the legalese—in Virginia, a supplier can submit an invoice associated with a written contract up to 5 years late and still have a legal right to get paid.

So, as outraged as you might be, here are some suggestions you might want to consider:

Escalate.  It’s probably the supplier’s accounts receivables department that’s coming after you and they’re likely the ones that boned up in the first place.  Don’t waste your time arguing your case with them.  Instead, contact your supplier's sales representative, tell him or her you’re unhappy and that you want to make sure the supplier’s management is aware of this screw-up.  Escalating the issue helps to set you up for most of the following recommendations.

Prove it.  Ask the supplier to prove that the goods or services were actually provided.  If you honestly can’t remember getting anything from the supplier, and the supplier can’t prove that you did get anything, it’s less likely that the supplier will come after you if you refuse to pay.

Push back.  If the supplier can prove that you did receive the goods or services, make a “good business sense” appeal to the supplier that you shouldn’t have to pay the invoice because it was submitted so late.

Negotiate a lower amount.  If the supplier refuses to forgive the invoice in its entirety, ask the supplier to reduce the amount of the invoice on the basis that it wasn’t budgeted for.

Push the payment out.  If the supplier is adamant that they be paid the full amount of the invoice, ask the supplier if payment can be pushed into your next budget year since you don’t have the amount of the invoice budgeted this year.

Threaten.  Yep, threaten.  But be reasonable first.  If the supplier provided the goods and services, you’re generally happy with the supplier, and paying the old invoice doesn’t constitute undue business hardship, then just grit your teeth and pay the invoice.  However, if you need to threaten that you’ll never, ever do business with the supplier again unless they make the old invoice go away, do it.  It may work.

Refuse to pay.  Even if the supplier is technically entitled to receive payment doesn’t mean—barring court order—that you will pay.  You can always tell the supplier that you refuse to pay and that they can come after you.  If the amount is small enough, they’ll likely write it off instead of spending money to sue you for it.

Circumvent state laws (legally).  As a preventative measure, you can contract around your state laws by including something similar to the following in your contracts with suppliers:

“Supplier acknowledges that it must submit invoices on a timely basis to Customer so as to avoid any unnecessary business hardship on Customer.  Notwithstanding the laws of the state of [insert state here] and Supplier’s rights to collect on debts, Supplier hereby agrees that Customer shall not be required to pay any invoices submitted by Supplier that are submitted by Supplier more than twelve (12) months following the date that the goods or services, as the case may be, were provided by Supplier.”

Here's a short white paper on vendor-managed inventory implementations I recently drafted and that I'm finally getting around to posting.  Happy reading!

Vendor-Managed Inventory Implementation Considerations.  It's Not a Panacea...

A vendor-managed inventory (VMI) is an inventory replenishment arrangement whereby the vendor monitors and manages the retailer's inventory—the vendor receives demand information electronically and then replenishes inventory based on, among other things, mutually agreed upon objectives for inventory levels, fill rates, and transaction costs.  The goal of VMI is to streamline supply chain operations for both vendor and retailer, as well as to reduce costs, time, and working capital, by moving the responsibility of inventory servicing and related decision-making further up the supply chain, i.e., to the vendor.

The benefits of VMI are clearly significant, as illustrated in a recent two-year study of VMI implementations conducted by Datalliance which included 65 location relationships spread across 12 distributors representing over 20,000 stock keeping units.  Over the two years, the study found that sales improved 47%, inventory turns increased by 38%, and stock-outs were reduced by 45%.

While VMIs were relatively new in practice during the mid- to late-1990s, many organizations jumped on the VMI band-wagon as a blanket panacea for their inventory management woes.  As time has progressed, inventory management professionals have come to realize that VMIs should be considered as a part of a tailored—and systematic—approach to inventory management.

VMI Implementation Considerations

The first threshold in considering VMI is whether or not VMI is even available as a supply chain strategy.  In many cases, vendors will only consider VMI for its higher-volume retailers.  The rationale is that while costs are reduced as a result of VMI, margins are reduced as well and VMI therefore can only be justified based on high-volume.  Once that threshold is met, subsequent implementation considerations typically center on three fundamental considerations: focus, trust, and patience.

Focus

The first consideration, and perhaps it is almost an admonition, is that a VMI implementation requires and involves significant focus.  Not all commodities are necessarily appropriate for VMI.  For example, if demand for a particular commodity cannot be forecasted with any greater of a degree of accuracy by the vendor than the retailer, the benefits of VMI are diminished.  Another aspect of focus is whether or not the vendor can adequately support a VMI implementation.  Thus, VMI implementations should be confined to those commodities that make sense, such as high-volume / low-variation commodities, and where the vendors of those commodities are sophisticated enough in their own supply chain practices to support VMI.

Trust

Another critical consideration for a successful VMI implementation is trust.  Buyers new to VMI sometimes distrust the effectiveness of VMI programs, and, fearful of stock-outs, become overly involved in monitoring the program—ultimately resulting in the program’s failure.  To this end, mutually-agreed upon contractual commitments are a critical basis for a trusting business relationship.  Generally speaking, such contractual commitments in the context of VMI should include commodities to be managed, locations to be managed, maximum and minimum inventory levels, frequency of replenishment, service level objectives with associated liquidated damages, and procedures for administrative activities such as determining demand forecasts, handling returns, and invoice processing.

Patience

A VMI implementation can be complex, initially fraught with missteps, and require collaboration that is atypical between vendors and retailers: the vendor / retailer relationship must be fostered, trust built, processes and procedures developed, information systems integrated, and myriad other activities accomplished.  All of these activities take time and do not even consider all of the various implementation problems that are likely to occur.  Thus, patience from both vendor and retailer is demanded by the long-term effort that is inherent to VMI implementations.  Even beyond the phase of implementation, patience is required in terms of results expectations.  While articles and white papers describing dramatic VMI successes—predominately from consultants who implement VMI solutions—abound on the Internet, more scholarly and pragmatic articles require somewhat more diligence to research.  In reviewing these more realistic perspectives, it becomes clear that the beneficial results from a VMI implementation take time and effort…and require patience from all involved stakeholders.

Conclusion

While this note is by no means complete in a thorough discussion of VMI—nor was it intended to be—the thrust is that focus, trust, and patience are broad yet critical considerations in terms of a VMI implementation.  Beyond that, the “devil is in the details” for any VMI implementation to be successful.