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Concept
Vendor-managed inventory
Summary
Vendor-managed inventory (VMI) is an inventory management practice in which a supplier of goods, usually the manufacturer, is responsible for optimizing the inventory held by a distributor.
Under VMI, the retailer shares their inventory data with a vendor (sometimes called supplier) such that the vendor is the decision-maker who determines the order size, whereas in traditional inventory management, the retailer (sometimes called distributor or buyer) makes his or her own decisions regarding the order size. Thus, the vendor is responsible for the retailer's ordering cost, while the retailer usually acquires ownership of the stock and has to pay for their own holding cost. One supply chain management glossary identifies VMI asThe practice of retailers making suppliers responsible for determining order size and timing, usually based on receipt of retail POS and inventory data. although a 2008 article notes that there is no standard definition of VMI and the term's usage varies "significantly" among companies supporting VMI processes.
A third-party logistics provider may also be involved to help ensure that the buyer has the required level of inventory by adjusting the demand and supply gaps.
One of the keys to making VMI work is shared risk. In some cases, if the inventory does not sell, the vendor (supplier) will repurchase the product from the buyer (retailer). In other cases, the product may be in the possession of the retailer but is not owned by the retailer until the sale takes place, meaning that the retailer simply houses (and assists with the sale of) the product in exchange for a predetermined commission or profit (sometimes referred to as consignment stock). A special form of this commission business is scan-based trading, where VMI is usually applied but its use is not mandatory.
This is one of the successful business models used by Walmart, Procter & Gamble and many other big box retailers. Oil companies often use technology to manage the gasoline inventories at the service stations that they supply (see Petrolsoft Corporation).
Official source
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