vendor-managed inventory (VMI)

Contributor(s): David Essex

Vendor-managed inventory (VMI) is an inventory management technique in which a supplier of goods, usually the manufacturer, is responsible for optimizing the inventory held by a distributor.

VMI requires a communication link—typically electronic data interchange (EDI) or the Internet—that provides the supplier with the distributor sales and inventory data it needs to plan inventory and place orders. In contrast, under the traditional arrangement the distributor handles those tasks. The inventory can be owned by the distributor, or by the supplier, often under consignment. 

The benefits of a vendor managed inventory system may include better inventory accuracy, forecasting, and service, though it can present challenges in communication, cultural resistance, and setting clear lines of responsibility.

This was last updated in November 2011

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Most of our clients who have implemented vendor-managed inventory in their businesses haven't seen too many challenges. Just having the ability to offer VMI services can help land new accounts, because VMI seems to cut down on time wasted by traditional sales visits. Errors, too.