What Is Vendor Managed Inventory?

Vendor managed inventory (VMI) is a type of business model in which business owners and vendors operate together to maintain an optimum level of inventory at the business owner’s retail establishment or warehouse. In place of the traditional method of ordering, in which the business owner or buyer checks his inventory and then places an order, a system is put into place that allows the product levels to be monitored through a computer program linked directly to the vendor. The vendor then automatically ships product to the buyer, often even stocking the shelves, without any manual type of order being placed. In this kind of relationship, the participants are often referred to as trading partners, although this is not meant to imply any sort of formal or legal partnership.

The familiar and ever-present bar code is a part of an electronic data interchange, which is the computerized system at the heart of the vendor managed inventory process. Data is transferred between trading partners entirely without human input. This happens instantaneously, which is a benefit to the business owner and the vendor, especially as it impacts the vendor’s ability to adjust production. It also occurs in a manner that is far less susceptible to error.

This model of supply chain management is used by many larger retailers. Not only does it save time and manpower, it also reduces the likelihood that stores and retail outlets will run out of products. When the actual display and stocking of shelves is the responsibility of the vendor, it is in everyone’s best interest that it be done efficiently and in a manner that displays the product in the best way possible.

It may appear that the business owner is assuming a vulnerable position in allowing the vendor to control how much product is being ordered. With a vendor managed inventory system in place, however, the liability is often shared. This can be in the form of consignment stock, in which the retailer is simply offering the merchandise for the vendor and keeps a percentage of the sale. The arrangement might also be that if the vendor places product that does not sell, that product can then be returned based on previously agreed-upon terms in place between the respective parties. Vendor managed inventory is designed to increase efficiency, but it also promotes a more in-depth understanding of customer needs by vendors.