What is Vendor-Managed Inventory (VMI)?

Vendor-managed inventory (VMI) is a process where the manufacturer generates orders for the distributor based on demand information sent by the distributor using Enterprise Resource Planning (ERP) system . During this process, the manufacturer is guided by mutually agreed objectives for inventory levels, fill rates and transaction costs.

VMI is a planning and management system that is not directly tied to inventory ownership. Under VMI instead of the distributor monitoring sales and inventory for the purpose of triggering replenishment orders, the vendor assumes responsibility for these activities.

In the past, many manufacturers operated vendor-stocking programmes where a representative visited a distributor a few times a month and restocked their suppliers up to an agreed level. VMI replaces these visits with information gathered from cash registers and transmitted directly to a manufacturer's computer system via ERP. Now, manufacturers can monitor sales of their products and decide when to initiate the replenishing procedure.

To understand VMI, let us look at to business models:

The Conventional Business Model: When a distributor needs a product, they place an order against a manufacturer. The distributor is in total control of the timing and size of the order being placed. Under this model, the distributor maintains their inventory plan.

Vendor Managed Inventory Model: The manufacturer receives electronic data that informs it about the distributor's sales and stock levels. The manufacturer can view every item that the distributor stocks as well as the true point of sale data. The manufacturer is responsible for creating and maintaining the inventory plan. Under VMI, the manufacturer generates the order, not the distributor.

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