Industrial Vending Machines transforming VMI in MRO sector

By Suchismita Dhal, Customer Success Lead and Vijith Bhargavan, Senior Research Analyst

The concept of vendor-managed inventory (VMI) is not very new. However, it has gained ground in the past two years or so. Over time, VMI has taken different names and models in a variety of industries, such as vendor-managed replenishment, supplier-managed inventory, direct store delivery, direct plant delivery, and field inventory management, among others.

Similarly, in the MRO category, VMI has extended its scope to industrial vending machines (IVMs). IVMs have become the new favorites for MRO category managers across industries. IVMs can help reduce inventories and costs, improve supply chain efficiencies, and reduce administrative tasks around ordering, issuing and monitoring, and managing ordering levels.

These machines are effective for almost every industry but make more sense for manufacturing industries, such as automobiles, oil and gas, chemicals, pharmaceuticals, metals, and others, and to other continuous production and assembly lines.

The global IVM market was estimated at around $765 million in 2017 and is expected to increase to $1.41 billion by 2025, for a CAGR of 7 percent (2018–2025).

North America holds the largest market share (about 35 percent), followed by Europe, given the maturity of suppliers and the proximity to customer sites.

How is Industrial VMI Making a Difference in the MRO Space?

The manufacturing industry has faced huge challenges in managing its MRO C section items, mostly consumables such as fasteners, tools, personal protective equipment (PPE), and other low-value, high-volume items.

Most of the time, ineffective ordering and improper identification of stocks, lack of predictability or poor forecasting, and higher inventory of non-critical and high-volume items in stores (that not only increase holding costs but also occupy warehouse space, among others) increase the company’s category spend.

Moreover, the major challenge faced by maintenance personnel on the shop floor is to order and issue items required during production operations. Considerable production time is wasted on the time spent walking to ask for consumables and other spare parts from the centralized store and to make purchase requisitions to the purchasing department, which orders different items from multiple suppliers, creating multiple work logs.

The entire process is time-consuming and labor-intensive. Again, products are often bought in large batch quantities to reduce the possibility of a stock-out or to obtain a supplier discount. This stock becomes obsolete over time. In contrast, failing to stock the right items can result in unplanned downtime and can have a major impact across the manufacturing process and supply chain in terms of both costs and service level to the customer.

The last major problem is that stores are open only for a particular duration, beyond which staff cannot be accessed and, hence, they begin to build a squirrel stock. This squirrel stock cuts down on the time that workers waste making multiple visits to stores. However, squirrel stock can ultimately result in over-procurement of high-volume items, reduced traceability of usage, theft, and more cash tied up in MRO stock. Therefore, to nullify these constraints on the production floor, point of use (POU) vending machines, popularly known as IVMs, make business sense for many organizations. This machine acts as a perfect tool to save lost production time, optimize MRO inventory, and streamline spending.

What Category Managers Need to Know about Industrial Vending Solutions as an Option

What is an Industrial Vending Solution?

Industrial vending and POU solutions have evolved over the years to operate smarter and leaner and to capture the always out-of-control spend category—indirect/MRO materials. IVMs act as automatic dispensing units for different types of MRO items. The vending machines can accommodate smaller items, such as eye protectors, aprons, gloves, shoes, fasteners, hand tools, and others, and larger tools and spares of different sizes and  Shapes.

These IVMs come with auto-replenishment options and provide usage tracking on high-volume, low-value items and can be located in proximity to the end user at the production floor.

IVMs can be managed using a min–max inventory control tool or other forecasting data models that notify the user about the re-order level of items, eliminating instances of stock-outs at any given point.

Inventory management, security, and accountability are usually primary performance drivers, along with intelligent usage data analytics-based purchasing and stocking decisions. 

Where is it Applicable?

Procurement managers need to understand the value proposition of these IVMs for their business. For example, if a company has high MRO (e.g., PPEs, tools, and consumables) consumption and seeks to lower its consumption and reduce inventory for high volume MRO items, it should definitely consider such a vending solution.

These machines best suit industries that require a higher volume of part supplies for its operations, have continuous production, and face significant losses during maintenance downtime.

For MRO consumables and PPEs, for which forecasting is difficult and consumption patterns are inconclusive, a vendor-managed inventory solution is very effective. From a purchase manager’s perspective, if the frequency of ordering low-value items is quite high and managing inventory is difficult, such arrangements can reduce the effort and cost and prove to be more efficient.

What are the Available Options?

The two most common options to implementing IVM in the facility are through either preferred MRO suppliers in a vendor-managed inventory engagement or vending machine OEMs, where the buyer can engage multiple suppliers for different items.

Industrial Vending Machine Business Models

Model A – Supplier Dependent  (MRO Suppliers with VMI)	Model B – Supplier Agnostic (Vending Machine OEMs + Suppliers)
This model is followed predominantly by MRO distributors/integrators. Vending machines are rented to buyers on a contract basis, for example, three to five years	This model is followed predominantly by OEMs, such as Autocrib and IVM. Vending machines are sold at a lump price instead of being rented
Suppliers in this model generally provide a vending machine as a solution; that is, they provide both the machine and the MRO products that need to be dispensed based on demand.	OEMs generally supply only the machine and associated software. Buyers manage the inventory on their own. Suppliers can link inventory management software to the preferred MRO supplier
Cost for buyers constitutes MRO products being dispensed, and software and machine rental costs. An invoice is submitted to the buyer on a monthly basis	As mentioned, the buyer must pay a one-time cost for the machine and its associated software. The model is more flexible in terms of inventory management

Both options have their pros and cons: sourcing managers need to choose based on their business requirements. Although the option to source vending machines from OEMs seems more expensive than the other option, it can be flexible in terms of storing different items of different sizes and volume, also providing the opportunity to source from multiple suppliers based on the business requirement

Other Key Considerations for Industrial Vending Machines

Whether to Buy or Rent

• The buyer needs to decide based on organizational requirements and future strategies.
• Buying requires a higher initial investment relative to renting; however, it can be very effective if the buyer has a large MRO spend and has a tough time managing inventory. Renting is more effective if the buyer has a relatively small spend.

The following key questions can help in the decision making.

• Does the buyer save more with reduced consumption than what the machine(s) costs?
• How much labor and time are saved through such an implementation?
• How much time is saved by not interrupting the workflow (that machines work 24/7 and getting an item from them takes about 10 seconds)?
• How much time and energy is saved by the buyer from the reduced administration?
• What is the total cost of ownership of the IVM (if renting suppliers take care of operation and maintenance of the equipment, and operating costs add up to the TCO if bought)?

Supplier Selection Criteria

Many suppliers are available in the market with similar service offerings for IVM. Because this space is constantly evolving, suppliers with investments in research and development are better positioned for the future. Many companies are working toward continuous innovation and further integrating the service offering. For example, with the introduction of the cloud-based system, the industrial vending solution has become a lot easier for companies to afford, implement, and use. Apart from ease of implementation, ease of usage and training, ease of integration (data syncing with existing ERP, material management plans, forecasting tools, and others), and features for automatic replenishment are very important. The supplier who understands the business requirement and provides a customized solution should be selected.

Savings and ROI (Return of Investment)

The savings achieved from using IVMs are important. Most vending solutions claim to give more than 50 percent savings and ROI months and even days after installation. However, the actual results vary greatly from company to company. Category managers have to understand that they need to consider non-monetary factors when calculating KPI and ROI because those are more important when making the business case for IVM implementation

Other Benefits

• Product consumption – stop waste and abuse by placing limits on quantities, shifts, jobs, and total dollar value spent
• New tools – machines can automatically dispense reconditioned items before new ones
• Stock-outs – real-time inventory count is available, with min and max levels that trigger replenishment
• Obsolete inventory – machines can dispense older supplies before newer and track turn rates

The following are the most visible areas of savings:

Savings Headers	Percent Contribution to Savings
Labor/Work-hour Reduction: Reduction in time spent ordering, receiving, material handling, and invoice processing; work hours saved per day, number of people involved, transaction log creation, and others
Reduction in Consumption Reduction in annual usage by 50–60 percent from increased accountability, judicious usage, no squirrel inventory, improved monitoring, reduction in theft/misuse/misplacing items
Inventory Cost Reduction Less in-hand or local inventory (~40–50 percent reduction), reduction in carrying cost (~12–30 percent)
Emergency Freight Cost for Stock Lower freight and handling cost because the ordering and stock keeping are vendor managed

Conclusion

Industrial vending has been one of the fastest growing markets in the industrial supply sector over the past four to five years. Given advancements in technology, these IVMs are doing much more than dispensing small PPE items. The manufacturing sectors have come forward to adopt more than many industries in the recent past because the loss associated with operational downtime is greater than for many other sectors. Improved data connectivity has allowed MRO distributors and integrators to supply IVMs as not just products but as a service to customers that goes well beyond inventory management. The services are quite economical, and a cloud-based solution can be accessed along with the data services, analytics, installation, maintenance, and services necessary to deploy IVMs with only a monthly subscription cost.

The industrial vending solution provides a combined result through a spending reduction and cost savings strategy that goes beyond the cost of managing the program. This solution provides ample opportunity to take the MRO category spend to performance levels never experienced and add profits to the bottom line year over year.