Saving $3M with VMI & Consignment: A Chemical Industry Success

Saving $3M with VMI: A Chemical Industry Success Story

In the high-stakes world of procurement, balancing cost savings, operational efficiency, and supply chain reliability is a constant challenge—particularly in industries like chemical manufacturing, where downtime can be catastrophic. During my tenure as a Logistics Engineer at a chemical company I worked for, I tackled this challenge head-on, managing a $30M spend on PPE and operational supplies at a major U.S. production site. The result was a $3M savings through a VMI and consignment model, achieved by leveraging data-driven supplier negotiations and cross-functional collaboration. Here’s how I did it—and the lessons I’ve carried forward as a procurement leader.

The Challenge: High Costs and Inventory Risks

At the chemical company, our $30M spend on PPE and operational supplies was critical for maintaining operations at our largest U.S. production site. However, inefficiencies were a persistent issue. Stockouts posed a constant threat to production timelines, while high inventory holding costs strained working capital. The Supply Chain team was initially resistant to a Vendor-Managed Inventory (VMI) model, as it would require us to own the material, necessitating cycle counts and additional storage locations in SAP—moves that would have to be managed manually. Their preference was a consignment inventory model, where we wouldn’t own the material until it was pulled from the machine. My task was to find a solution that addressed these concerns while delivering significant cost savings and operational improvements.

Aligning Stakeholders: The Power of Cross-Functional Collaboration

Success in procurement often hinges on collaboration, and this project was no exception. I brought together a diverse team of stakeholders: Finance, Supply Chain, SAP Systems Managers, IT, Site Logistics, and Operations. The turning point came during a pivotal meeting where we debated the merits of VMI versus consignment. Supply Chain’s resistance to VMI stemmed from the operational burden it would place on their team—additional storage locations and manual SAP updates were dealbreakers. This discussion clarified that consignment was the better path, as it shifted inventory ownership to the supplier until the point of use, reducing our operational overhead.

Getting to this consensus wasn’t easy. Beyond internal alignment, I faced resistance from MRO suppliers. Of the five suppliers included in the bid, only two were open to transitioning from VMI to a consignment model—a hard discussion that required persistence. I overcame this by focusing on mutual benefits: a longer-term service contract (extending from 3 to 5 years) and clear price targets, which I’ll detail next. This experience underscored the importance of involving all stakeholders early and ensuring their concerns are addressed before moving forward.

Negotiating with Data: Securing Supplier Buy-In

Supplier negotiations were the linchpin of this initiative, and I leaned heavily on data to drive outcomes. I analyzed historical spend data, usage reports, and supplier scorecard evaluations to assess proposals and identify the best partner. A leading MRO/PPE supplier, eager to grow and solve our challenges, emerged as the top candidate. While they had less leverage on pricing compared to larger competitors, their flexibility in adopting a VMI-to-consignment solution made them the ideal fit.

I set aggressive price targets—10% below current pricing—and required a consignment model as part of a 5-year service contract. Initially, the supplier hesitated, concerned about the financial implications of holding inventory on our behalf. But by presenting usage reports that demonstrated consistent demand and offering a longer contract for stability, I secured their agreement. This data-driven approach not only locked in the 10% price reduction (translating directly to $3M in savings) but also laid the foundation for a stronger, more collaborative supplier relationship.

Implementing the Consignment Model: From Vision to Execution

With the supplier on board, implementation required meticulous planning. I started with site visits, walking through the production plant with top bidders to understand their vision for the consignment model. These visits were critical for aligning expectations and identifying potential challenges. Multiple meetings followed with SAP Systems Managers, IT, and Supply Chain to map out the impact on inventory management and material flow in SAP, our primary software for managing the process.

The consignment model was implemented at our largest U.S. site, which presented unique challenges due to its scale. We needed to ensure seamless material flow without disrupting production, which meant integrating the supplier’s inventory tracking into our SAP system and establishing clear protocols for material withdrawal. Despite the complexity, the process was smooth, thanks to the groundwork laid through cross-functional collaboration and supplier alignment.

Results: $3M Savings and Beyond

The results were transformative. The 10% price reduction alone delivered $3M in savings on the $30M spend, but the benefits extended far beyond that. By shifting to a consignment model, we reduced on-hand inventory levels by half, freeing up nearly $15M in working capital through lower holding costs and improved cash flow. While not quantified here, there was also an understood potential for a 20% usage reduction, further enhancing efficiency. Most critically, the consignment model eliminated stockouts, ensuring production continuity—a win for both Operations and Finance. These outcomes strengthened our supplier relationship, setting a precedent for future collaborations.

Key Takeaways for Procurement Leaders

This project taught me two invaluable lessons that I’ve carried into every role since. First, data-driven decisions are non-negotiable—historical spend data and usage reports were critical to securing supplier buy-in and achieving savings. Second, cross-functional alignment is the bedrock of success. We didn’t realize until late in the project how challenging VMI would be for our team compared to consignment—a misstep we could have avoided by diving deeper into the operational details earlier.

As a procurement leader, I now prioritize involving all stakeholders from the outset and taking the time to understand the full process flow, including potential downstream impacts. This approach ensures not only cost savings but also operational resilience—qualities I’m eager to bring to a Director of Procurement role. If you’re looking to transform your procurement function with data-driven strategies and collaborative leadership, I’d welcome the opportunity to connect.