Inventory
What is vendor-managed inventory?
Vendor-managed inventory (VMI) is an arrangement where the supplier, not the store, monitors your stock and decides when to replenish it, within limits you agree. You share sales and stock data, and the supplier keeps you between an agreed minimum and maximum. It can cut stockouts and admin, but you give up some control over cash tied up in stock.
How vendor-managed inventory works
- You agree the rules: which products, minimum and maximum stock levels, delivery frequency, and who owns the stock and when.
- You share data: stock on hand and sales by SKU, usually daily or weekly, through a shared spreadsheet, a supplier portal or an integration.
- The supplier plans replenishment based on your sales and their own production schedule.
- Stock arrives without you raising each purchase order.
- You review performance: stockouts, overstock and fill rates against the agreement.
Also called supplier-managed inventory. A related arrangement, consignment stock, has the supplier keep ownership until the products sell.
Pros and cons for small brands
| Pros | Cons |
|---|---|
| Less time spent on purchase orders | Less control over how much stock you hold |
| Supplier sees demand early and can plan production | Requires sharing sales data with the supplier |
| Fewer stockouts on agreed products | Supplier may lean toward overstocking you |
| Can shorten effective lead times | Needs reliable, regular data sharing |
| Consignment versions protect your cash | Hard to negotiate without meaningful volume |
The main risk is incentives. A supplier is paid when you buy, so set clear maximum levels and review them regularly.
When VMI makes sense
- One supplier provides a large share of your stock, and you order from them frequently.
- Products are steady sellers with predictable demand.
- The supplier is set up for it, with a portal or the ability to receive your data.
- You trust them, and the agreement includes stockout and overstock limits.
It's a poor fit for new products, highly seasonal lines, or suppliers you order from only a few times a year.
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Most small brands get much of the benefit with lighter options:
- Share a forecast. Send your supplier a rolling three- to six-month forecast, so they can plan production before your order lands.
- Agree scheduled replenishment. Set a regular order rhythm, such as every four weeks, with quantities adjusted to sales.
- Set reorder points yourself, and send purchase orders automatically when stock hits them.
- Use blanket orders. Agree a total quantity for the year, released in smaller deliveries.
Reorder points are the simplest way to keep control while still restocking on time. The guide to inventory replenishment compares the main methods, and inventory management methods covers JIT, ABC analysis and more.
FAQ
What is VMI?
Vendor-managed inventory: an arrangement where the supplier monitors your stock and decides when, and how much, to replenish, within limits you agree together.
Who owns the stock in VMI?
It depends on the agreement. In standard VMI you own the stock once it's delivered. In consignment VMI, the supplier owns it until it sells, which protects your cash but is harder to negotiate.
Is VMI common for small online stores?
It's much more common with large retailers. Suppliers need enough volume to make the extra work worthwhile. Small brands are more likely to use simpler versions, such as shared forecasts or scheduled replenishment.
What data does a supplier need for VMI?
At minimum, stock levels and sales by SKU, updated regularly. Better arrangements also share forecasts, promotions and lead times.