What is VMI?
VMI stands for Vendor Managed Inventory, an inventory management arrangement where the supplier (vendor) is responsible for monitoring and replenishing the customer’s inventory levels. In simpler terms, the manufacturer or brand takes over the task of managing stock for the retailer.
Under VMI, the vendor regularly reviews the retailer’s sales and inventory data (often with direct system access or automated reports) and makes restocking decisions on the retailer’s behalf. The retailer, in turn, agrees to trust the vendor to keep them in stock. It’s a shift from the traditional model, where the retailer places purchase orders, to a more collaborative model, where the supplier says, “We’ve got you; we’ll send the product when you need it.” Common examples include a snacks company managing inventory at a grocery chain’s warehouses, or an electronics supplier managing stock levels at a retailer’s distribution center. The ultimate goal is to ensure shelves are replenished efficiently without the retailer having to micro-manage orders.
Why VMI matters in CPG
Vendor Managed Inventory can be a game-changer for CPG brands that sell through big retailers or distributors. Here’s why it matters:
- Improved In-Stock Rates: Since the vendor is monitoring the inventory consumption in near real time, they can react faster to replenish. This often leads to higher shelf availability (fewer stockouts) because you’re not waiting for a retailer’s purchase order cycle. For example, if you see that stores are trending above forecast, you as the supplier can proactively ship more product before a stockout occurs.
- Stronger Partnerships: Retailers typically implement VMI with trusted suppliers. It deepens the collaboration – the retailer is basically saying, “We trust you to manage part of our business.” For the brand, this is an opportunity to solidify that relationship and potentially get preferential treatment (like more shelf space or inclusion in data sharing programs). Executives at CPG firms like VMI because it can tie you closer to key accounts and sometimes even lock out competitors if you become the category captain through superior service.
- Efficiency and Visibility: With VMI, Demand Planners and Supply Chain teams gain direct visibility into the retailer’s inventory and sales data (usually a prerequisite for VMI). This is huge – it’s like a window into downstream demand. Rather than relying on sporadic orders, you see actual sell-through and current stock levels continuously. That means you can plan production and distribution with the retailer’s real demand in mind, reducing the bullwhip effect (demand distortions in the supply chain). It also often reduces overall inventory in the system – no need for the retailer to hold as much safety stock, because the vendor is actively keeping it at optimal levels.
- IT and Data Integration: VMI programs lean heavily on data integration. IT/Data Engineers set up electronic data interchange (EDI) or API feeds so that the vendor receives daily (or even more frequent) updates on inventory position and sales. They might implement documents like EDI 852 (Product Activity Data) which gives a regular report of inventory and sales at the retailer. Handling this data and plugging it into the vendor’s planning systems is a big part of making VMI work. In many cases, the vendor’s ERP will automatically generate a replenishment order when it sees the retailer’s stock drop below an agreed threshold – effectively the ERP is placing an order on behalf of the retailer.
- Multifunctional Impact: Sales/National Account Managers in a VMI setup shift to more of a consultative role rather than just order takers. They ensure that the program is meeting the retailer’s expectations and adjust the parameters as needed (like min/max inventory levels, new product introductions, etc.). Supply Chain Leaders monitor the flow and troubleshoot issues (like if a shipment is delayed, they might expedite to avoid an outage at the retailer). Analytics teams measure the results, often showing metrics like service level improvements or reductions in stock levels. Everyone from the warehouse loaders (shipping on a more frequent cadence to the retailer) up to the CEO sees the impact of VMI when it’s running smoothly: products move steadily, with fewer fire drills for stockouts or overstocks.
In summary, VMI matters because it’s a win-win if executed properly. When done right, the retailer gets better availability and fewer headaches managing the inventory, and the vendor often gets more consistent orders and insight into consumer demand patterns. It effectively aligns the supply chain more tightly between the two parties.
(Many leading CPG brands use VMI with major retailers. To make it successful, having real-time inventory visibility is key. Alloy.ai, for instance, can ingest a retailer’s inventory and sales data and alert you, the vendor, when it’s time to restock – acting like a control tower for your VMI program.)
Real-World Example
Imagine you’re a National Account Manager for a canned beverages company, and one of your largest accounts is a convenience store chain that has set up VMI with your company. Instead of waiting for this retailer to send purchase orders, your team is in charge of keeping their regional distribution centers stocked with your drinks. How does your day-to-day look under VMI?
Every morning, you receive an automated report (via EDI or maybe a shared Alloy.ai dashboard) showing the chain’s current inventory and sales by SKU at each of their DCs. You notice that for one SKU – a popular energy drink flavor – the inventory at the Northeast DC is down to 5 days of supply and dropping fast because of a summer promotion. Normally, the retailer’s system might trigger an order when they hit, say, 3 days of supply. But you’re proactive: you work with your Demand Planner and Supply Chain team to execute a replenishment shipment now, to arrive before the weekend. Essentially, you just created an order for yourself on behalf of the customer.
Meanwhile, in the Southeast region, another flavor isn’t selling as quickly, and inventory at the DC is more like 4 weeks of supply (above the target of 2 weeks). With VMI, you also manage this by slowing down or pausing further shipments of that flavor until sales catch up, preventing overstock. You inform the retailer’s inventory manager of the plan, so they’re in the loop. Over the course of the month, you and the retailer agreed on KPI targets, such as maintaining in-stock levels above 98% at stores and ensuring 14 days of supply at the DCs. Thanks to your team’s close monitoring, you hit those targets. Stores had almost no stockouts of your energy drinks (which means you maximized sales), and the DCs didn’t end up with excessive inventory (good for both parties’ working capital).
From the IT side, this VMI setup required integration: your company’s systems receive daily POS and inventory data, and your ERP or planning tool generates suggested shipments. Your Data Engineers made sure the data mapping was correct (e.g., the retailer’s item codes map to your SKUs, units of measure align, etc.). They also set up alerts – if a DC’s inventory days of supply falls below a threshold, an alert pings the planner. One day you get an alert that one region’s data feed hasn’t updated in 3 days. You coordinate with the retailer and your IT folks to fix the data pipeline, because flying blind is not an option in VMI; you depend on their data.
At quarter’s end, you review the outcome with the Executive team: The VMI program led to a 5% increase in sales for that chain compared to last year, largely due to fewer out-of-stock incidents and better timing of promotions (since you had direct visibility, you ensured inventory was in place pre-promo). Also, the retailer’s report card shows your company achieved a 99% service level and reduced overall inventory in their network by 20% (because they didn’t need as much safety stock). This solidifies their trust in your brand. Your CEO even mentions this as a success story of collaboration. Essentially, VMI turned what could be a chaotic order process into a smoothly managed partnership, and you, as the account manager, became more of a supply chain collaborator than just a salesperson.
Key Metrics and KPIs for VMI
- In-Stock Percentage: The proportion of time (or stores) that have the product in stock on the shelf. Under VMI, vendors and retailers often agree on very high targets (e.g. 98% or higher in-stock). This is a direct measure of VMI success – the whole point is to keep the shelf from going empty. You’ll measure it by looking at store inventory levels vs. zero stock situations, often using the retailer’s data.
- Days of Supply (DOS) at Customer: How many days of inventory the retailer is holding, either at their distribution center or stores. In VMI, you usually set an optimal range (e.g. “keep 10-14 days of supply at the DC”). Too low, and you risk stockouts; too high, and you’re tying up capital and storage space. Monitoring DOS helps you adjust shipment frequency. If DOS dips too low, that’s your trigger to send more product. If it’s too high, you might delay shipments.
- Inventory Turnover at Retailer: This is how fast a product is selling relative to the product inventory. A higher turnover means the product isn’t sitting idle. Under VMI, a vendor often aims to increase turnover for the retailer by preventing overstock, which is a selling point of VMI (fresher product, less capital tied up). You’d calculate it as annualized sales divided by average inventory at the retailer’s locations.
- Fill Rate (Vendor to Retailer): Even though the vendor is managing inventory, you still measure how well the vendor fulfills the retailer’s needs. Fill rate here would be the percentage of the retailer’s demand (or orders, if they still formally place them as a formality) that the vendor supplied on time. If your production has an issue and you can only supply 80% of what’s needed, that’s a problem – VMI doesn’t magically solve supply issues, it just shifts the planning. A strong fill rate from your side (ideally 95-100%) is crucial to reap VMI’s benefits.
- Stockouts Prevented / Emergency Orders: A metric sometimes tracked to illustrate VMI value. For instance, “Under VMI, we had 3 emergency replenishments that avoided potential stockouts” or conversely track if any stockouts happened. In a non-VMI world, those might have been missed sales or last-minute scramble orders. Keeping a count of “we avoided X stockouts” is a way to communicate success to both companies. Similarly, reduction in rush orders or expedited shipments is a KPI – if VMI is working, you shouldn’t need as many last-minute expedites because you’re managing proactively.
- Retailer Sell-Through Rate and Sales Growth: Ultimately, the vendor will look at how VMI affects actual sales through to consumers. If the in-stock improves, you should see an uptick in sell-through. Many VMI partners set goals like “grow the category sales by Y%” or “gain X points of market share at this account,” with VMI being a strategy to achieve that. These high-level KPIs tie the inventory management initiative to real business outcomes (more revenue).
Related Terms
- CPFR (Collaborative Planning, Forecasting and Replenishment): A broader supply chain collaboration framework between retailers and suppliers. VMI can be considered a component of CPFR. CPFR involves jointly forecasting demand, planning promotions, and sharing data so both sides can optimize. VMI specifically focuses on the replenishment part, but you’ll often see it as part of a CPFR program with key accounts.
- Consignment Inventory: A model somewhat related to VMI where the vendor’s product sits in the retailer’s warehouse or store, but the vendor retains ownership until it’s sold. Many VMI arrangements also involve consignment. The benefit to the retailer is they don’t pay for product until it sells; the benefit to the vendor is potentially better shelf space and guaranteed presence. However, the vendor carries more inventory risk. It’s worth knowing if discussing VMI, as the financial aspect (who owns the stock) can vary.
- EDI 852 / 856 / 850: Specific EDI document codes relevant in VMI. EDI 852 is Product Activity Data – it conveys inventory levels and sales data from retailer to vendor (crucial for VMI). EDI 850 is a Purchase Order (which might not be regularly used in VMI, since the vendor triggers shipments, though sometimes “POs” are created after the fact for tracking). EDI 856 is an Advance Ship Notice (from vendor to retailer, saying “here’s what I’m sending you”). These are the plumbing of how VMI data flows and are terms your IT team will know well in setting up VMI integrations.
- Min/Max Levels: In a VMI agreement, the vendor and retailer often agree on minimum and maximum inventory levels. For example, “each store should have at least 5 and no more than 15 days of supply” or “the DC should reorder when stock hits 500 units and bring it back up to 1,500 units” (Min = 500, Max = 1500 in that case). These parameters guide the vendor’s replenishment decisions. Managing and periodically adjusting these min/max levels is a key task in maintaining a VMI system, ensuring they reflect current sales reality.
- Supply Chain “Control Tower”: A term for a system or team that has end-to-end visibility and can manage exceptions in real time. VMI essentially makes the supplier a control tower for the retailer’s inventory of that supplier’s products. Brands often invest in control tower software (sometimes part of an ERP or a specialized platform) to monitor all this data. For instance, Alloy.ai can function as a kind of control tower by pulling in retailer inventory data and highlighting where intervention is needed (much like air traffic control for inventory).