What Is Vendor-Managed Inventory (VMI)? Complete Implementation Guide

Traditionally, sellers manage inventory once they receive it from their suppliers, but sometimes, there's a better approach. That's why many modern companies let vendors handle inventory for them. But exactly what is vendor-managed inventory?

VMI is one of several ways sellers can outsource aspects of their fulfillment process. We’ll explain VMI and how it can help you reduce inventory costs and improve relationships with key stakeholders.

The Role of EDI in VMI Success

Effective VMI relies on seamless, automated data exchange between suppliers and retailers. Electronic Data Interchange (EDI) serves as the backbone of modern VMI programs by enabling real-time communication of critical inventory documents.

Key EDI Documents for VMI:

• EDI 852 (Product Activity Data): Communicates inventory levels, sales data, and product movement from distributors to manufacturers
• EDI 855 (Purchase Order Acknowledgment): Confirms receipt of VMI-generated purchase orders
• EDI 856 (Advance Ship Notice): Updates VMI systems with ship dates and quantities
• EDI 846 (Inventory Inquiry/Advice): Provides real-time inventory status updates
• EDI 870 (Order Status Report): Delivers planned ship or delivery dates

Without EDI integration, VMI programs rely on manual data entry, spreadsheets, and email—creating delays, errors, and defeating the purpose of automated inventory management. Modern cloud-based EDI platforms like Orderful enable VMI implementation in days rather than months by automating document exchange and eliminating complex mapping requirements.

Orderful gives companies a more efficient way to connect, test, and exchange data with their partners through one unified platform. You can explore the full platform to see how it supports modern EDI workflows for VMI and visit our pricing page to understand how cost effective it is to get started. Ready to enable VMI with your trading partners? Book a demo to see how Orderful's EDI platform simplifies vendor-managed inventory implementation.

Typical features of vendor-managed inventory solutions

A vendor-managed inventory process relies upon an agreement between a supplier (often the manufacturer) and a retailer or other type of seller in which the supplier is responsible for inventory management, leaving the seller free to focus on other activities. This relationship is often facilitated by dedicated software.

The nature of a VMI agreement varies depending on what will best optimize operations. Still, most VMI solutions share some common characteristics.

• Inventory ownership and control: In a VMI system, vendors retain ownership and control of the inventory. Sellers display the products on their premises, making them available to consumers or other business owners. They receive a commission on each sale.
• Collaborative planning and communication: A successful vendor-managed inventory requires effective collaboration between trading partners. Working together helps identify sources of risk and ensure everyone has the correct data.
• Demand forecasting: VMI software helps the supplier forecast the demand for each item, reducing carrying costs and ensuring they stock the right products. Forecasting also identifies items that don't sell so they can adjust their product mix based on current trends.
• Data exchange: Suppliers must track stock levels, process purchase orders, and ship items. If they ship items across international borders, they must also comply with stringent customs requirements. An effective VMI system streamlines the exchange of inventory-related documents between stakeholders.

Benefits of vendor-managed inventory

Once you implement a VMI system, you can look forward to taking advantage of the following vendor-managed inventory benefits:

Enhanced supply chain collaboration

The primary goal of a vendor-managed inventory process is to optimize operations for all trading partners. Everyone works together to achieve common goals. This requires a high level of collaboration throughout the supply chain.

Improved inventory management

A robust VMI system simplifies demand forecasting and determines when to order more of each item, minimizing the seller's required storage space. Because the vendor manages inventory, VMI also reduces unnecessary ordering. All these changes lead to optimized inventory management.

Better customer experience

Vendor-managed inventory reduces the likelihood that popular items will go on backorder. When customers can rely on a seller to carry their favorite products, they have better experiences with the brand. Improved customer experiences may increase brand loyalty, making the company even more successful.

Improved decision-making capabilities

A digital vendor-managed inventory solution provides access to data on everything from daily units sold to monthly revenue. This data informs decisions about pricing and ordering.

Stronger relationships with trading partners

Suppliers and sellers must implement a robust communication system and mutually beneficial terms and conditions to achieve success with vendor-managed inventory. Setting ground rules strengthens the relationships among stakeholders.

Increased forecasting accuracy

Demand forecasts are only as good as the underlying data. Accurate information is needed to ensure precise forecasting that prevents stockouts and unhappy customers. A VMI system’s advanced reporting capabilities provide high-quality demand forecasts.

Reduced costs

As previously noted, a vendor-managed inventory process reduces unnecessary ordering. The less a company orders, the less it has to manage. Therefore, VMI reduces inventory carrying costs.

Challenges of vendor-managed inventory

VMI certainly provides benefits, but you must understand its challenges before committing to a new type of inventory management. Here are some of the most common roadblocks associated with a VMI approach:

• Increased data management: VMI increases access to inventory-related data, but you must be wary of data-entry errors and other mistakes.
• Difficulty establishing communication: VMI improves communication between suppliers and sellers over time, but there's often a learning curve. It may take some time before everyone is on the same page.
• Dependency on the vendor: If you’re a seller implementing VMI, you must rely on vendors for inventory management. An unreliable vendor may cause you to run out of popular items or experience other inventory-related problems.
• Technological demands: Before implementing a VMI system, you may need to purchase new servers or update your technical capabilities — potentially costly endeavors. Once you update everything, you may also need to train employees to use the new systems and equipment.
• Admin costs: Implementing and maintaining a VMI system increases administrative costs, which may diminish your company's profit margin.

VMI vs Traditional Inventory Management

5 considerations when implementing VMI systems

Once you have determined that a VMI system is right for your business, you must plan for several requirements. These are the primary considerations for a company getting started with VMI:

1. Planning and coordination: Before you set anything in stone, communicate with trading partners to determine the best way to implement a vendor-managed inventory process that benefits all parties.
2. Forecasting: Ensure you’re up to speed on demand forecasting. You may need to invest in forecasting tools, hire someone with experience producing demand forecasts, or train existing employees to handle forecasting duties. Accurate forecasts will tell you how much safety stock — extra items kept on hand to avoid stockouts — you should order, among other considerations.
3. Service level: When establishing a service level, you set goals and create metrics for measuring them. For example, your agreement with a vendor may state that you expect to have no more than three stockouts per quarter.
4. Lead time: You need ample time to implement a VMI system correctly. Before choosing a plan, you must also assess how much lead time your trading partners need to perform certain actions.

VMI Implementation: Traditional vs Modern EDI Platform

Real-life examples of companies using VMI

It's easier to understand the benefits of VMI after examining a good vendor-managed inventory example. Here are two examples to inspire you:

Walmart

When shopping at Walmart, you may see vendors stocking shelves or taking notes on stock levels. That's because Walmart relies on vendor-managed inventory for its success.

Every supplier can access Walmart's inventory data, allowing them to determine when to order more items or remove certain items from the shelves. In exchange, Walmart controls the delivery of merchandise from warehouses to stores.

Amazon

Amazon has thousands of third-party sellers and uses a vendor-managed inventory process to keep things organized. Maintaining control of millions of items would be nearly impossible, so every third-party vendor is responsible for its own inventory.

Amazon gives each vendor access to inventory data so they can determine when to replenish stock. Amazon’s vendor tools also help vendors determine if certain products aren't selling as well as expected, allowing them to replace underperforming products with more popular ones.

VMI Implementation with Orderful's EDI Platform

Orderful simplifies VMI implementation by providing the EDI infrastructure that powers automated inventory collaboration. Unlike traditional VMI software that requires separate EDI setup, Orderful's modern approach combines both:

Fast Implementation:

• Connect suppliers and retailers in days, not months
• Pre-configured EDI connections for major trading partners
• Automated mapping eliminates manual setup

Real-Time Data Exchange:

• Instant transmission of inventory levels and sales data
• Automated purchase order generation and confirmation
• Real-time shipment visibility through advance ship notices

Seamless Integration:

• Works with existing ERP systems (Microsoft Dynamics, NetSuite, SAP)
• Single API for all trading partner connections
• Cloud-based platform requires no hardware investment

Reduced Costs:

• Flat-rate pricing per trading partner
• No VAN fees or transaction-based charges
• Eliminates need for separate VMI software

By handling the complex EDI integration that VMI requires, Orderful lets suppliers and retailers focus on collaboration rather than technical implementation.

Overcome inventory challenges with Orderful

Vendor-managed inventory solutions reduce costs, enhance collaboration, and improve inventory management. Combining VMI with electronic data interchange (EDI) maximizes these benefits by allowing you to seamlessly exchange electronic documents with your trading partners.

Orderful offers a fast, modern EDI platform to help you grow your business. Learn more about how we can help you enhance your inventory data interchange process by talking to one of our EDI experts.

Frequently Asked Questions About Vendor Managed Inventory

What is vendor managed inventory (VMI)?

Vendor-managed inventory (VMI) is a supply chain management approach where the supplier (vendor) takes responsibility for managing and replenishing inventory at the retailer's or distributor's location. The vendor monitors sales data, inventory levels, and demand forecasts to make proactive replenishment decisions, ensuring optimal stock levels while reducing the buyer's inventory management workload.

How does EDI enable vendor managed inventory?

EDI (Electronic Data Interchange) enables VMI by automating the exchange of critical inventory documents between suppliers and retailers. Key EDI transactions include the 852 (product activity data), 855 (purchase order acknowledgment), 856 (advance ship notice), and 846 (inventory inquiry). EDI eliminates manual data entry, reduces errors, and provides real-time visibility needed for effective VMI implementation.

What are the benefits of vendor managed inventory?

VMI benefits include reduced inventory carrying costs (30-40% savings), improved supply chain collaboration, decreased stockouts and overstocking, enhanced demand forecasting accuracy, lower administrative costs, improved customer satisfaction through better product availability, and stronger vendor-retailer relationships through increased trust and data sharing.

What are the challenges of implementing VMI?

VMI challenges include establishing trust and data-sharing agreements between partners, integrating technology systems for real-time data exchange, ensuring data accuracy and consistency, managing dependency on vendor performance, implementing EDI infrastructure for document exchange, and adjusting to new processes and workflows. These challenges can be mitigated by working with modern EDI platforms that streamline technical implementation.

How long does it take to implement VMI?

VMI implementation time varies significantly by approach. Traditional VMI with custom EDI setup can take 3-6 months due to system integration, testing, and partner onboarding. Modern cloud-based EDI solutions can enable VMI implementation in days to weeks by providing pre-configured connections, automated mapping, and streamlined partner setup. The timeline also depends on the number of trading partners and complexity of existing systems.

What is the difference between VMI and traditional inventory management?

In traditional inventory management, buyers make all ordering decisions and manage their own stock levels, often leading to higher safety stocks and carrying costs. With VMI, suppliers assume responsibility for monitoring inventory and making replenishment decisions based on real-time sales and inventory data shared through EDI. VMI shifts the burden from buyer to supplier while optimizing inventory levels for both parties.

What is the difference between VMI and consignment inventory?

VMI focuses on the supplier actively managing replenishment decisions while the buyer typically owns the inventory upon delivery. Consignment inventory means the supplier retains ownership of goods until they are sold or used by the buyer, reducing the buyer's financial risk. VMI can be combined with consignment (consigned VMI) where the supplier both manages replenishment and retains ownership until sale.

Do I need special software for vendor managed inventory?

Yes, successful VMI requires technology for automated data exchange and inventory tracking. At minimum, you need EDI capability to exchange documents like purchase orders, inventory reports, and advance ship notices. Modern cloud-based EDI platforms like Orderful provide the complete infrastructure needed for VMI without requiring separate VMI software, expensive hardware, or complex integration projects.

How much does vendor managed inventory cost to implement?

VMI implementation costs vary widely. Traditional approaches with custom EDI setup and separate VMI software can cost $50,000-$200,000+ for initial setup plus ongoing maintenance. Modern cloud-based EDI platforms offer subscription pricing starting at $200-$1,000+ monthly per trading partner with no large upfront costs. The total cost depends on number of partners, transaction volumes, and whether you use a managed service or build in-house.