Vendor Managed Inventory
Definition
A replenishment arrangement in which the supplier monitors the customer's inventory and demand data and decides when and how much to replenish. The vendor takes responsibility for keeping agreed stock levels in place.
In Practice
Under VMI, the customer shares point-of-sale or warehouse withdrawal data, and the supplier plans replenishment against agreed minimums, maximums, and service targets. The supplier gains a clean demand signal and can smooth its own production; the customer sheds ordering workload and typically sees higher availability with less stock.
Success depends on data quality and clear rules. Both sides must agree on the stocking bands, how overstock and obsolescence are handled, and how performance is scored. VMI is common between consumer goods manufacturers and large retailers, and between component suppliers and factories for C-class hardware.
Example: a bearings supplier manages bins at a machinery plant, scanning levels twice weekly and replenishing to max. Line-down events from missing bearings drop to zero, the plant's purchasing team stops cutting 60 POs a month, and the supplier gains visibility that lets it cut its own safety stock by 15 percent.
Related Terms
Stock held at the customer's location but still owned by the supplier until it is used or sold. The customer pays only upon consumption, shifting inventory ownership cost upstream.
Min-Max PlanningA simple replenishment method where an order is triggered when inventory falls to a minimum level and stock is replenished up to a maximum level. The min acts as the reorder point and the max caps the order-up-to quantity.
ReplenishmentThe process of restocking inventory to meet ongoing demand, whether by purchasing from suppliers, transferring between locations, or triggering production. It is the execution engine that keeps stock policies real.