Vendor Managed Inventory (VMI)

The customer's purchase order is replaced by a replenishment proposal the supplier generates against agreed limits per location. What the supplier receives is usually an inventory report (EDI INVRPT) and sales data; what it sends back is a delivery and an invoice, sometimes issued by the customer itself. Ownership is a separate question from who plans, and the two get confused because both shift work to the supplier.

• VMI – the supplier decides quantity and timing; the customer owns the goods on delivery.
• Consignment – the supplier owns the stock until it is sold or consumed.
• CMI (co‑managed inventory) – the supplier proposes, the customer confirms before shipment.

Vendor managed inventory in practice

Whether VMI reduces stock or only moves it one step back depends on which signal crosses the boundary between the two companies. Where the customer shares only its own orders, the supplier is forecasting an ordering policy – batch sizes, order calendars, promotional buy‑ins – rather than end demand, which is the bullwhip effect with the supplier's own name on the order. Where sell‑out and on‑hand stock per location arrive daily, the supplier can plan the customer's stores and warehouses the way it plans its own.

The second boundary is censored demand. Days when the item was out of stock at the customer look like zero demand in the shared history, and a forecast trained on them settles below real demand, pulling the agreed minimum level down with it. Veritico STOCK accounts for stockouts and forecasts true demand per item, location and day, then turns that forecast into orders inside the logistic constraints a VMI supplier has to respect anyway: minimum order quantity (MOQ), order multiples and pack sizes.

The integration pays off where deliveries are frequent and the supplier forecasts better than the customer. On sporadic items at a single location neither side forecasts well, and the gain comes from somewhere else – from treating the network as one pool, with allocation by target service level and stock transfers of surplus, rather than a min–max agreement store by store.

Related terms

• Replenishment
• Bullwhip effect
• Safety stock
• Service level
• Multi‑echelon inventory optimization
• Phantom inventory