The Retailer’s Guide to Vendor Managed Inventory: From Concept to Implementation
Inventory Delegation Dream: Some businesses find relief in outsourcing inventory management, reducing the burden of reporting and worrying about reorder schedules.
Less Reporting, More Relaxing: Outsourced inventory management minimizes the need for constant report analysis, freeing up precious time for other business operations.
Redefining Inventory Responsibilities: Handing over inventory duties allows businesses to focus elsewhere, trusting that stock levels and reorder needs are handled efficiently.
Trust in Expert Hands: By delegating inventory tasks, businesses can rely on specialized expertise to manage stock, streamlining processes and ensuring timely reordering.
Reorder Worries No More: Outsourcing inventory concerns provides peace of mind, as the responsibility of maintaining adequate stock levels shifts to capable managers.
Can you imagine handing over the keys to your inventory management kingdom?
For some businesses, that might sound like a dream. Think: fewer reports to sift through and someone else worrying about when to reorder.
For others, the idea sends shivers down their spine.
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What if something goes wrong?
Who's actually in control?
Vendor-managed inventory (VMI) raises many questions, and rightfully so. You’re restructuring your supply chain and counting on someone else to run the show.
Let’s shed light on this trust-driven supply chain strategy, so you won’t let doubts and fear stand in the way of what might be the right fit.
What is Vendor Managed Inventory (VMI)?
Vendor managed inventory (VMI) is a collaborative inventory management process where you let your suppliers run things in the backend.
With this set-up, their roles go beyond delivering goods.
They also manage the inventory flow on your behalf, handling everything from day-to-day stock decisions to strategic demand planning.
Their responsibilities include functions like:
- Monitoring stock levels
- Forecasting future demand
- Planning replenishment cycles
- Creating purchase orders
- Managing safety stock thresholds
- Tracking inventory turnover
- Optimizing delivery schedules
- Adjusting to seasonal trends
Vendor-managed inventory is a two-way street.
Vendors gain better control of their workflows and stay ahead of demand. And you, as a retailer, get to sit back and relax while enjoying better inventory accuracy and a more agile supply chain.
Well-known retailers like Walmart, Amazon, and Bosch count on VMI to automate their orders, especially since they manage countless SKUs and have a vast network of sellers.
The VMI Process: How It Works (vs Other Models)
In traditional inventory management, you place orders yourself and manually track your stock levels and movement.
But when you let your vendors take the driver’s seat, you’ll need to put a few non-negotiables in place, so the ride goes as smoothly as possible. These are:
- Shared data access. Suppliers require real-time access to your sales and stock data to make informed decisions.
- Replenishment agreements. Together, you’ll define parameters around minimum stock levels, reorder points, and delivery frequency.
- Aligned performance metrics. Both need to agree on KPIs like inventory turnover, stockouts, and service levels (to name a few).
You don’t need this much structure and alignment when you’re handling inventory in-house, right?
But in case you're still scratching your head and want to understand more about how VMI works, let’s look at other models and analyze how they differ:
- CMI (co-managed inventory): Your vendor gets access to your system, gaining complete visibility of your inventory data. They’ll make a recommendation based on their observations and analysis, but you still call the shots.
- Consignment inventory: Products remain under your consignor’s (vendor) ownership until you (the consignee) sell them. That sounds like a win, but inventory maintenance still falls on your shoulders.
- Just-in-time (JIT) inventory: You get your products only when needed. The goal of JIT is to keep your stock levels as lean as it can get. Here’s a complete guide on JIT if you think this is a better inventory management strategy for you.
- Dropshipping: You sell the goods, but you never touch them. It’s more hands-off than VMI, because the orders go straight from your vendor to your customer.
- Cross-docking: Goods are brought in, sorted out, and sent right back out, eliminating the need for storage. You work with your vendors and partner carriers to keep up with the pace, but you don’t receive strategic inventory management—it’s all you.
Does this inventory management strategy sound more suitable for your business? Read this guide for more info on cross-docking.
Here’s a quick comparison chart to make things a bit clearer:
| Model | Who owns inventory? | Who manages replenishment? | Best suited for... |
|---|---|---|---|
| VMI | Vendor | Vendor | Collaborative relationships with strong data sharing |
| CMI | Retailer | Shared (Vendor recommends) | Teams that want guidance but retain control |
| Consignment | Vendor (until sold) | Retailer | Retailers looking for low-risk purchasing |
| JIT | Retailer | Retailer | Lean inventory operations with tight supply chains |
| Dropshipping | Vendor | Vendor | Hands-off fulfillment models |
| Cross-docking | Retailer | Retailer | Fast-moving, high-volume logistics |
All these inventory management strategies have benefits. You’ll have to decide what fits your business better.
And since we’re focusing on VMI right now, I’ll highlight what you’ll stand to gain when you choose to entrust inventory control to your suppliers (and what they’ll gain in the process, too).
Top Benefits of VMI for Retailers (and Their Suppliers)
There’s more to VMI than just sitting back and letting someone else streamline your inventory.
And while it does take inventory stress off your plate, your vendors aren’t doing charity work. They get something in return, as well.
Here’s why some retailers and suppliers prefer VMI:
Improved stock availability
A study proved that VMI can reduce stockouts by 31%
That’s huge, and largely thanks to your vendors replenishing your stock based on real-time inventory data.
Leaner stock levels for you, and no big alterations to production planning and schedule for them.
Reduced inventory costs
There’s no need to raise your safety stock levels or overstock your goods during peak season, which means fewer holding costs and more shelf space for high-turnover items.
Your partners benefit as well. They don’t have to rush shipments and can also maximize their storage space.
Best of all, no one has to bear the costs of overproduction.
Supply chain efficiency
Since your vendor can adjust their capacity planning based on your real-time inventory flow, you can trust that replenishment will take place on schedule with them in charge.
Vendor-managed inventory skips the back-and-forth that usually takes place when reordering.
Better demand forecasting
Real-time data makes both sides better informed, and it sharpens inventory forecasting too.
Your suppliers also get a front row seat to trends and product movement, clueing them in on what you need and when.
Stronger relationships
Think about it: Why would you let go of a supplier who does an awesome job managing your inventory?
Their deeper involvement in your supply chain management makes them extremely difficult to replace.
Common Challenges and Risks of VMI
All these benefits sound enticing, right? But before you jump the gun, you need to know why VMI isn’t a perfect fit for every retailer.
Vendor reliance
Some brands just aren’t ready to relinquish inventory control to their partners.
And that’s fair… This is your livelihood we’re talking about.
With VMI, you’re putting your trust in a vendor to always deliver, adapt, and prioritize your business. That level of reliability can be hard to guarantee from all your partners.
Legal expenses
Sure, you get cost savings on inventory admin, but you’ll have to shoulder the legal overheads.
VMI comes with legal safeguards—like non-disclosure agreements, inventory liability, and clearly defined SLAs—to keep your suppliers aligned.
Larger retailers have legal teams to handle that without blinking. But if you’re running a relatively small business, this can drain you financially.
Tech infrastructure availability and compatibility
Your vendors need to have the technical capabilities and expertise to enable real data sharing.
That means automated inventory updates, live dashboards, and accurate demand forecasts, to name just a few non-negotiables.
If your partners don’t have that infrastructure or if your own systems aren’t compatible, it’s going to be a rough ride.
Potential security breaches
Sharing sensitive data with an external organization exposes your business’ soft underbelly.
The numbers back it up: 98% of organizations work with a third party that’s been breached, and 29% of all breaches can be traced back to those third-party connections.
5 Best Practices for a Successful VMI Program
How do we find a way to navigate around the common pitfalls of VMI? Follow the steps below to create a successful VMI program with your partners.
1. Establish a clear framework, expectations, and boundaries
Boundaries are important in any relationship—yes, I said it. In vendor-managed inventory, this can look like defining the following:
- Points of contact. Who's your go-to when questions, hiccups, or authorizations come up? This goes both ways to ensure communication remains clean and fast.
- Service level agreements (SLAs). What are your vendor’s formal commitments on things like stock availability, fulfillment accuracy, and response times? This is how you hold your vendors accountable.
- Storage capacity. How much product will realistically fit on your shelves? You need to make sure vendors don’t flood them with excess inventory.
- Acceptable inventory levels. What’s the sweet spot for inventory? Just enough to meet demand without sapping capital.
- Inventory thresholds. What are the points where you need to reorder? VMI is designed for keeping your shelves stocked without overburdening you.
- Payment terms. How are vendors getting paid? It’s very critical, especially if they ship goods before invoicing.
- Return policies. How are unsold or damaged goods handled? This should cover the responsible party, the frequency, and the process.
- Decision-making boundaries. How much power do you still have? Clarifying who gets to make which calls helps both parties stay in their lane, and out of each other’s way.
Working out these details and getting them in writing early on keeps things on track, especially when things are a bit murky—think fluctuating demand and internal changes.
A lack of clarity around inventory ownership can create tension.
Once, we assumed our supplier would auto-replenish based on old patterns—but our usage spiked, and they weren’t watching as closely as we thought.
We fixed it by setting clear SLAs and weekly check-ins.
2. Align on shared KPIs and inventory metrics
You’ve heard me say it already: Shared goals and values are foundational to a good VMI partnership.
And how you measure those goals can serve as a compatibility check.
Before moving forward, sit down with your vendor and decide together what success actually looks like and how you can both track it.
Some great metrics to start with:
- Inventory turnover rate: How quickly will products be sold and replaced? High turnover usually means healthy demand and smart stocking. To compute inventory turnover rates, use this formula:
Turnover Rate = (Cost of Goods Sold (COGS) / Average Inventory Balance of a Matching Period) x 100
- Lead times: Once inventory hits its reorder point, how long does it take to get restocked? The shorter and more consistent, the better. To compute lead times, use this formula:
Lead Time = Order Delivery Date - Order Request Date
- Stockout rates: How often do you run out of a product? Fewer stock shortages mean more satisfied customers. To compute stockout rates, use this formula:
Stockout Rate = (Number of Stockouts / Total Number of Orders) x 100
- Carrying costs: How much does it cost to hold inventory? VMI should bring this number down. To calculate carrying cost (%), use this formula:
Carrying Cost (%) = (Inventory Holding Sum / Total Inventory Value) x 100
- Fill rates: What percentage of customer demand is fulfilled without an interruption or backorder? To compute fill rates, use this formula:
Fill Rate = (Total Completed Orders / Total Orders) x 100
- Order accuracy: Do orders arrive in the right quantity and condition? To compute order accuracy, use this formula:
Order Accuracy = Counted Inventory / Recorded (Expected) Inventory) x 100
- Transaction costs: Do you spend too much time or money managing orders? With VMI, you shouldn’t be.
Data is great for decision-making, but it’s also useful for staying aligned with your vendors. Keep track of them to reveal the strengths and weaknesses of your partnership.
3. Use the right tech stack for real-time data sharing
VMI is only successful if you and your vendors use the same playbook and are using the same inventory and sales data.
Building a VMI system is foundational—and it largely influences how fast you can launch.
According to Ashley Hetrick, sourcing and supply chain segment leader at BDO USA:
A full-scale VMI program typically takes 6 to 12 months to implement, assuming the system requires real-time data exchange.
Here are three integration methods that you could use for data sharing in a VMI set-up:
- Electronic data interchange (EDI): A standardized system that automates data transfers between you, your sales channels, and internal systems, and those of your supplier.
- Cloud-based inventory platforms: These tools remove the need for bulky hardware and on-site servers. You and your partners can share the info on the real-time movement of your products, no matter their physical location.
- Enterprise resource planning (ERP) systems: Implementing an ERP system pulls all your business processes and data, including inventory, finance, and supply chain, into one place. It becomes quicker to make VMI-related decisions if you only have to look for the info you need in one place.
Setting up the seamless exchange between current tools and your new solution is step one. Step two is making good use of the information it produces.
Here’s an example: Cin7 Core layers in an AI-powered tool called Cin7 ForesightAI, based on deep learning to predict demand spikes, optimize reorder points, and so much more.
This level of intelligence takes VMI from reactive to proactive.
Whether you opt for cloud-based, ERP-integrated, or EDI-powered, your inventory management system needs to keep up with real-time demands and shared visibility.
If you’re wondering which platforms actually deliver, we’ve rounded up the best options for VMI:
4. Prioritize open communication and collaboration
Data sync and automation keep everyone on top of regular updates.
But any abrupt changes—like sudden demand shifts or product changes—should be flagged ASAP by both parties. For this, you’ll need to set up clear communication channels with all key team members and stakeholders involved in the VMI process.
Use email, internal messaging tools like Slack and Microsoft Teams, and project management platforms like Asana or Monday, to loop everyone in and hold them accountable.
As Brian Kroeker reflects on implementing VMI at his business, Little Rock Printing: “Good communication solves most issues.”
5. Invest in change management and team training
Change isn’t easy, especially if you shortchange your people.
In fact, studies show that up to 70% of change initiatives turn sour due to employee resistance or lack of support.
Shifting to VMI impacts how your team communicates, collaborates, and uses technology. It requires a mindset reset. Something that you can help guide them through:
- Offering internal training sessions that tackle the “what,” “why,” and “how” of vendor-managed inventory
- Breaking down each role’s part in the transition so that nobody is left guessing.
- Sharing clear, accessible policies and procedures for each department.
- Encouraging open feedback loops and ongoing process refinement.
I’ll give you an example of why this is important:
As soon as you start sharing sensitive inventory and sales data with external vendors, your cyber risk goes up.
Strict encryption protocols and updated security tools can only get you so far. Without a properly trained team, they won’t recognize and mitigate vulnerabilities soon enough to avoid full-scale breaches.
Training is an important part of the equation. But to really tighten up your VMI processes, you need to get all your teams (legal, procurement, ops IT) to the same table. The goal is to create a cross-functional alignment.
Sometimes the thought of handing over inventory control to your suppliers is worrying.
Staff who’ve spent years managing inventory can feel their expertise is being sidelined, or feel concerned that suppliers are not reliable.
To tackle this, I’d suggest creating simple visual guides to show each department’s role so everyone is clear on the process.
I’d also recommend making it easy for staff to give feedback on what’s working and what needs tweaking. That way, you can spot issues before they become expensive problems
How to Choose the Right Vendor Managed Inventory System
Your vendor-managed inventory system is the engine under the hood. It'll keep things moving forward if you pick the best option for your business.
Follow these three steps to find out which one it is:
1. Focus on the features that drive real VMI results
Modern inventory management systems come with plenty of benefits, but not all of them support a VMI setup.
If you’re looking to build out a VMI system that drives results, you need the following IMS features:
- Real-time visibility. Enables you and your suppliers to adjust the quantity and improve turnover rates. A standard inventory report usually focuses on a predefined period. VMI dashboards offer current and dynamic information at all times.
- Automated replenishment. With predefined triggers and algorithms, your system can automatically generate purchase orders based on inventory levels below predefined thresholds. No manual involvement needed.
- AI-powered forecasting. Artificial intelligence can analyze historical data and predict future demand and disruptions better than any formulas. It increases your adaptability for better inventory planning and lowers the risk of inventory distortion.
- System integration. A seamless exchange of data between VMI software and existing ERP, WMS, and ecommerce platforms maximizes operational efficiency.
These features support supplier-retailer collaboration.
Ease of integration with your current systems should be key.
Ideally, VMI vendors are already subscribed to gateways like SPS Commerce or Commerce Hub.
This enables ease of onboarding SKUs, inventory, and order processing and standardizes the workflow for one retailer to connect with many VMI vendors.
Forego flashy features. Opt for core functionality.
2. Identify what type of VMI solution fits your business
Your VMI solution needs to match your scale and complexity.
What works for a global retailer with 55 warehouses won’t necessarily work for a growing SMB.
So follow the tips below when making a decision:
- Evaluate your order volume and product complexity. Your system’s capacity should be able to handle the number of SKUs and product lines you have.
- Map out your vendor ecosystem. Managing a single supplier is very different from multiple vendors across various categories
- Assess your current tech maturity. Check whether systems like POS, ERP, and WMS works well with your VMI solution.
- Review your internal capabilities. Your team should be able to manage and maintain the new system.
All of this to say: Your new system needs to work with what you already have, not force you to restructure everything.
As someone who manages a small business like Little Rock Printing, Brian shares that it’s absolutely possible to run a successful VMI setup without making too much fuss or breaking the bank:
We don’t have a massive operation, so we make it work. Tools like QuickBooks Commerce can be enough to get started.
You don’t need a huge platform—just clean data, a committed supplier, and a clear process.
3. Ask smart questions before choosing your vendor
VMI takes vendor relationships a bit deeper, so it’s your right to dot the i’s and cross the t’s.
Ask your suppliers questions like the following before inking the deal:
- What’s your blueprint for VMI program implementation? Look for clarity on onboarding time, rollout phases, team responsibilities, system requirements, and timelines. Many providers offer a pilot phase, which lets you try out the system with a limited set of products before a full launch.
According to ECR Community:
A pilot project will give you a chance to adjust your processes and IT solution if needed, without causing major upheavals.
It’s also an opportunity to gauge your partner’s and employees’ reaction to the program.
Lastly, it highlights any adjustments to your agreed targets or measuring tools to ensure that you are measuring the desired outcomes in the best way possible.
- Are there any integration gaps I should know about? Can their system plug directly into your POS, ERP, or WMS? If not, how do they handle workarounds? These are the places where hidden manual processes or costs can creep in.
- What are your metrics for success, and how do you measure them? This clues you in on how aligned you are with what “success” looks like. They earn plus points if they can show how these KPIs are reported in real-time dashboards or reports.
- How will I access and interpret the data you provide? Determine where you can see the relevant details (such as inventory levels, reorder points, and lead times), and how they will be communicated to you. Ask if they offer visual dashboards, summary reports, or automated alerts to flag critical shifts in demand or stock levels.
- How will you collaborate with our team? Ask for a clear point of contact and check which collaboration tools they use.
Get Ready to Hand Over Your Inventory Management
If you’ve decided that vendor-managed inventory is the right move for your business, the next step is making sure you do it right.
Select a VMI solution that fits your scale, tech stack, and supplier relationships, and use the tips from this guide to vet vendors and establish clear agreements with them.
Remember how we started with the idea of handing over the keys?
With the right system and safeguards in place, you’ll see that you're not losing control. Instead, you’re giving your business (plus yourself and your team) more room to grow.
Here are a few more resources you can dive into to help you choose the right platform and strategy:
- What Does Inventory Management Software Cost? A Complete Pricing Guide For Ecommerce Brands
- 16 Best Inventory Management Software for Small Businesses Reviewed In 2025 | The Retail Exec
- 25 Inventory Management Software Requirements You Can’t Go Without
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Vendor-Managed Inventory FAQs
Got more VMI questions in your head? Find the answers here:
What should be included in a VMI pilot program?
Start by selecting a small subset of SKUs and a trusted vendor to work with.
Based on research performed by ECR Community, you also need to “have a system in place to monitor and capture information about how well the program is working. Set up daily/weekly briefing meetings with your first partner.”
Track the set KPIs and compare results with your pre-VMI benchmarks.
You should also go over the day-to-day flow and any exception handling so you can see how the system behaves when things go wrong.
How does VMI affect relationships with third-party logistics (3PL) providers?
3PLs are considered a VMI alternative. In both cases, you outsource inventory management to a third-party provider. However, 3PLs are considered inventory management and order fulfillment experts—their services revolve primarily around these business areas.
If this is the type of support you’re looking for, here’s a roundup of 3PL partners we highly recommend.
What kind of ROI should businesses expect from a VMI program?
Ashley sums up the answer nicely:
“The ROI is higher for organizations that have a large number of inventory items for which managing variable consumption is both time-consuming and resource-intensive.
For these organizations, there is a significant risk associated with not having in-demand items on hand at the time when they are needed because it could lead to business delays or stoppages.”
