Under VMI, the retailer shares their inventory data with a vendor (sometimes called supplier) such that the vendor is the decision-maker who determines the order size, whereas in traditional inventory management, the retailer (sometimes called distributor or buyer) makes his or her own decisions regarding the order size.
[2] A third-party logistics provider may also be involved to help ensure that the buyer has the required level of inventory by adjusting the demand and supply gaps.
[6] Oil companies often use technology to manage the gasoline inventories at the service stations that they supply (see Petrolsoft Corporation).
VMI helps foster a closer understanding between the supplier and manufacturer by using electronic data interchange formats, EDI software and statistical methodologies to forecast and maintain correct inventory in the supply chain.
Vendors benefit from more control of displays and more customer contact for their employees; retailers benefit from reduced risk, better store staff knowledge (which builds brand loyalty for both the vendor and the retailer), and reduced display maintenance outlays.
[7] Consumers benefit from knowledgeable store staff who are in frequent and familiar contact with manufacturer (vendor) representatives when parts or service are required.
At the goods manufacturing level, VMI helps prevent overflowing warehouses or shortages, as well as costly labor, purchasing and accounting.
[11] This enables risk-sharing between both parties, as the retailer carries risk of obsolescence while the vendor would have been accountable for capital costs and fluctuation in prices of the inventory.
[11] In this setting, retailer is responsible for inventory investment and holding costs, but has an option of protecting themselves against price fluctuations.
It is argued that sharing data and inventory can improve the supplier’s production planning, make it more stable and increase its visibility.
The supplier can therefore take advantage of this information and adapt its production to the customers’ requests, and respond faster.
[13] This stability and coordination allows to reduce the bullwhip effect,[14] as the manufacturer has a clearer visibility on the supply chain and an overview of the incoming demand.
E.g., the retailer will rarely face stock shortage and holding costs are kept at a minimum since just enough inventory is held.
For example, single-vendor single-retailer VMI model was extended for multi-product case,[20] the consignment stock (CS),[21] and discount.