Vendor-managed inventory

What it means

VMI, vendor-managed inventory, is a model in which the supplier monitors stock at the customer's site and replenishes it according to agreed rules. The customer no longer has to plan orders itself, because the supplier sees consumption and decides when and how much to deliver.

The model is part of modern supply chain management. The customer saves effort and cash tied up in inventory, while the supplier gains better visibility of demand and can plan production and transport more efficiently.

It rests on sharing data on stock and consumption, often automatically via EDI or linked systems. The parties agree minimum and maximum stock levels and possibly a safety stock, and the supplier is responsible for keeping levels within those limits.

How it works in practice

VMI is often combined with consignment stock, where goods remain the supplier's property until the customer takes them from the warehouse. For cross-border supplies within the EU, special VAT rules for call-off stock may apply, simplifying the supplier's registration obligations.

The customer should cover in the contract liability for stock-outs, rules on ownership and risk of damage, delivery frequency, the supplier's access to data and the invoicing method, for example based on actual withdrawals.

Successful VMI improves inventory turnover and reduces the risk of both shortages and surpluses. Like a kanban system, it is based on replenishing according to actual consumption rather than planning from forecasts.

What to watch out for

The customer becomes more dependent on the supplier and its systems. Data outages, integration errors or a deteriorating relationship can lead to stock shortages. It is therefore wise to have a fallback procedure and to check stock levels independently from time to time.

In the accounts, it must be determined correctly when ownership of the goods passes and when the tax liability arises. With consignment stock and call-off stock the goods are at the customer's site but do not yet belong to it, and records must capture actual withdrawals precisely.