What Is Vendor Managed Inventory (VMI)?
Also known as: VMI, supplier managed inventory, consignment stock
Definition
Vendor managed inventory (VMI) is an arrangement where the supplier monitors the buyer's stock of their products and decides when and how much to replenish, within agreed minimum and maximum levels. Ownership may transfer on delivery or on use.
Vendor Managed Inventory (VMI) Explained
In VMI the buyer shares consumption and on-hand data with the supplier, who is responsible for keeping stock between a minimum and a maximum. The buyer stops raising purchase orders for those items. The supplier uses the data, often through EDI or a portal, to plan production and shipments.
VMI is often combined with consignment, where stock sits at the buyer's site but is owned by the supplier until the buyer consumes it. The two are different. VMI describes who decides replenishment. Consignment describes who owns the stock. SAP supports consignment stock with special stock indicator K and info records, and Odoo and NetSuite support consignment through location and ownership setups. Infor LN and SyteLine typically model VMI through blanket orders, supplier schedules and a separate consignment warehouse.
The ERP work in a VMI setup is mostly in data exchange and settlement. The buyer needs timely stock and usage feeds to the supplier, plus a trigger that creates the invoice or self-billing document when material is consumed rather than when it is delivered.
VMI suits high-volume, low-value, steady-demand items such as fasteners, packaging and standard components. It works poorly for engineered-to-order parts or where demand data is unreliable.
Why It Matters
- It moves replenishment effort and often carrying cost to the supplier, which frees buyer time for strategic parts.
- Shared visibility reduces stockouts and the bullwhip effect between the two companies.
- Consignment variants delay payment until use, improving the buyer's working capital.
- It depends on accurate stock and usage data, so poor inventory accuracy breaks the model quickly.
In Practice
A plant uses about 800 gaskets a week. The supplier holds a minimum of 1,200 and a maximum of 2,400 in a bin at the plant. Each night the ERP sends on-hand and usage by EDI. When on-hand falls below 1,200, the supplier ships to bring it back to 2,400, and the buyer is invoiced weekly for the quantity scanned out of the bin.
Frequently Asked Questions
What is the difference between VMI and consignment inventory?
VMI is about who manages replenishment decisions. Consignment is about who owns the stock. They are often combined but can exist separately.
Who pays for the inventory in a VMI arrangement?
It depends on the agreement. In pure VMI the buyer may own stock on delivery. In VMI with consignment the supplier owns it until the buyer uses it.
What data does the supplier need in VMI?
Typically on-hand quantity, recent consumption, min and max levels, and open requirements. It is commonly sent by EDI, API or a supplier portal.
Related Terms
Kanban
Kanban is a visual pull system in which a card, bin, or electronic signal authorizes production or replenishment of a specific part only after downstream consumption, capping inventory at the number of signals in circulation.
Safety Stock
Safety stock is buffer inventory carried above expected demand to protect against variability in demand and supply during replenishment lead time. In ERP it is netted out of available inventory so MRP plans replenishment before the buffer is consumed.
Blanket Purchase Order
A blanket purchase order is a standing agreement with a supplier to buy an item or group of items over a period, typically at a fixed price or up to a total value. Individual deliveries are called off through releases against it.
EDI (Electronic Data Interchange)
EDI (Electronic Data Interchange) is the computer-to-computer exchange of business documents such as purchase orders, invoices, and shipping notices between trading partners in a standardized structured format, without human intervention.
Cycle Counting
Cycle counting is the practice of continuously verifying inventory accuracy by counting a small subset of items each day or week, rather than shutting down for one annual wall-to-wall physical inventory.
Working with Vendor Managed Inventory (VMI) in a live environment? Our engineers do this every day - and our AI agents automate most of it.