What Is Vendor Managed Inventory?

Learn About

• What is Vendor Managed Inventory (VMI) 

• How VMI can benefit manufacturers, suppliers, and retailers

• How to implement VMI

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What is Vendor Managed Inventory (VMI)

Vendor Managed Inventory (VMI) refers to a process where the responsibility for inventory management falls on the vendor, manufacturer, or source rather than the buyer--usually, in the context of retail supply chains, the retailer. 

VMI exists in a variety of industries, and it can indicate the general movement of inventory management farther back toward the source of the supply chain. But in the retail industry, it usually indicates the movement of inventory management from the retailer to the supplier. If done correctly, it can be an efficient means of reducing costs and avoiding unplanned overstocking and out-of-stocks (OOS). 

Related Reading: Replenishment 301 - Avoiding Out-of-Stocks 

For example, Vendor-Managed Inventory is similar to auto-fulfillment schedules for printers. When a consumer buys a printer, they can register with the brand to have replacement ink delivered when needed. 

If a consumer permits the printer company to access the printer's data, the manufacturer can ship the customer ink before it runs out. While this means more work on the manufacturer's part, a subscription service would reduce the hassle of managing ink levels and purchasing more, taking some of the burden off the consumer and giving the manufacturer better insight into future purchase orders. 

How Does Vendor Managed Inventory (VMI) Benefit Retailers?

In the retail industry, a similar process took shape over time as retailers and suppliers pinpointed supply chain inefficiencies as a key indicator of lost and diminished sales.

VMI benefits retailers by:

• Preventing Stock Exhaustion: Stock shortages can significantly affect retail service quality and result in dissatisfied customers and lost sales. VMI reduces stock exhaustion and prevents replenishment issues or shortages.

• Increasing Availability and Sales: By managing inventory and orders, suppliers can help retailers maintain better in-stock levels and on-shelf availability. Increased availability boosts sales, customer satisfaction, and repeat business.

• Reducing Carrying Costs: VMI reduces carrying costs by allowing retailers to order only the quantities they need, minimizing excess stock and lowering associated safety stock costs.

• Making More Time for Growth: By shifting inventory management to suppliers, retailers can focus more on growing their business and less on creating purchase orders.

How Does Vendor Managed Inventory Benefit Suppliers?

Although VMI implies more work for suppliers, there are a number of benefits for them in taking on this work:

• Fine-Tunes Supply According to Demand: VMI allows suppliers to ship products based on their demand plans instead of relying entirely on retailer forecasts. This approach considers historical sales, seasonality, and marketing efforts.

• Builds Stronger Bonds with Retailers: By ensuring timely shipments, VMI helps suppliers build stronger relationships with retailers. It also aids in meeting compliance programs like Walmart's On Time In Full (OTIF) initiative.

• Reduces the Bullwhip Effect: VMI mitigates the bullwhip effect by enabling suppliers to better forecast inventory needs using advanced insights from historical data and market trends.

• Facilitates Growth Without Old Stock Worries: With control over supply, suppliers can grow without the burden of managing obsolete stock.

Related Reading: The Bullwhip Effect and How to Prevent It

VMI at Walmart

As mentioned earlier, VMI means that suppliers have more work and reporting to zero in on sales performance. This means that staying up to date with the retailer's reporting tools is key to maximizing business. 

In Walmart, the sales reporting app used to be DSS in Retail Link. But in 2024, they switched over to Luminate (rebranding in 2025 as Scintilla). 

Related Reading: A Guide to Walmart's Luminate

How to Implement VMI

From both the retailer and the supplier side, implementing VMI is not a simple process. Many retailers have highly developed and sophisticated mechanisms/apps to give their suppliers insight into in-store and .com performance.

However, there are a few general principles that are key to implementation, whether looked at from both the supplier and retailer sides:

1. Develop Trust and Share Information: Elevate the vendor-customer relationship with transparency. Share demand plans, forecasts, and supply plans aligned with short- and long-term goals.

2. Streamline Supply Chains: Ensure the retailer has an organized inventory management system and the supplier can meet expectations.

3. Prepare Inventory Data: Use accurate, actionable inventory data to track supply and demand fluctuations.

4. Set Objectives and Define Processes: Establish clear goals and a replenishment process based on customer demand and historical data.

Examples and Varieties of VMI

There are many models for vendor managed inventory, but they are generally separated into two main categories of mathematical model:

• Bi-Level VMI Mathematical Models: These are models that are broken down into two main levels (or echelons) in the supply chain. For example, single-vendor/single-retailer, single vendor/multiple-retailer, or multiple-vendor/single-retailer models. In each of these there are still just two kinds of parties, even if multiple parties are involved.

• Multi-Level VMI Mathematical Models: These models are broken down into more than two main levels (or echelons) in the supply chain. For example, single-manufacturer/single-vendor/single-retailer, multiple-manufacturer/single-vendor/single-retailer, etc.

There are also different levels of VMI that exist along the spectrum of responsibility from manufacturer to supplier to retailer:

• Vendor Determines Order Quantity On-Site: The retailer handles the practical ordering and processing of inventory.

• Vendor Manages Inventory and Orders: Inventory is at the retailer's location, but the vendor determines when to place orders.

• Vendor Replenishes Inventory Remotely: Vendors analyze inventory levels and replenish stock as needed.

• Third-Party Inventory Management: Vendors outsource inventory management to a third-party warehouse.

Electronic Data Interchange and the VMI Process

In most cases, modern retailers provide electronic data (e.g., EDI) to inform the supplier about sales and stock levels. Using this data, the supplier creates and manages the inventory plan, deciding when and how to replenish stock.

At Walmart, the retailer uses Luminate/Scintilla as a means of keeping vendors/suppliers informed on their performance, whether that is their sales, instocks, or OTIF performance. The depth of insight available is limited to the amount of time vendors/suppliers can afford to dedicate to data analysis as well as the limitations of Basic- vs. Charter-level insights. 

Walmart suppliers have to pay a fee based on Walmart sales of their product to see performance data and data-driven insights that are gated behind the Charter paywall. 

Walmart's VMI Model

Walmart pioneered VMI for the retail industry in the 1980s by collaborating with manufacturers (especially Procter & Gamble) and using Retail Link (later Luminate/Scintilla) to share inventory and sales data. Suppliers use this data to forecast and fulfill inventory needs. 

Even still, most major retailers do not give the entire responsibility of generating orders to their vendors. It pays for all parties to be connected by the same accurate data. So, retailers are motivated to provide essential performance data with all parties involved. 

SupplyPike's Software and SupplierWiki's Resources

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Maintaining a healthy supply chain from start to finish is difficult in the retail world. SupplyPike's software helps retail suppliers in many major retailers.

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