Vendor Managed Inventory Explained: Benefits, Risks, and Metrics

Running out of stock too often or dealing with piles of unsold goods? It’s a common problem, as 74% of businesses face shipping delays and extended lead times. Hence, many are turning to Vendor Managed Inventory (VMI) to let suppliers take over the task of managing stock levels.

Instead of waiting for you to place an order, suppliers monitor your inventory directly and restock based on real-time data. This approach reduces guesswork, prevents delays, and helps avoid both shortages and excess inventory.

In this article, we’ll explain how VMI works, why major retailers in Malaysia are adopting it, and how your business can benefit from handing over inventory control to trusted suppliers.

What is Vendor Managed Inventory?

Vendor Managed Inventory (VMI) is a system where the supplier is in charge of managing the buyer’s inventory, even after the stock is delivered to the buyer’s warehouse. Instead of the retailer managing stock and reordering, the supplier tracks inventory and handles restocking using real-time data.

In Malaysia, many large retailers, such as Mydin or Aeon, use VMI with their local suppliers. For example, a beverage supplier may track product sales directly from the retailer’s system and replenish drinks on the shelves before they run out.

How Vendor Managed Inventory Works

Traditional inventory management puts the responsibility on the distributor or retailer to track stock and create purchase orders (POs) when new items are needed. In this setup, inventory may be owned either by the retailer or supplied under a consignment agreement.

In contrast, Vendor Managed Inventory (VMI) allows the supplier to retain ownership of the stock, even though it is stored at the retailer’s warehouse. To manage this, both parties need a system, usually via Electronic Data Interchange (EDI) or online platforms that lets the supplier access sales and inventory data.

Using this information, along with insights like lead times, production schedules, and possible shipping delays, the supplier can replenish stock efficiently and keep inventory levels well-balanced.

VMI works especially well when supported by wholesale inventory software, which helps vendors monitor large stock volumes across multiple locations with accuracy.

Metrics of Vendor Managed Inventory

Before starting a VMI partnership, both the retailer and supplier agree on key performance indicators (KPIs) to guide inventory decisions that benefit both sides.

Common KPIs in a VMI setup include:

• Inventory turnover – how often inventory is sold and replaced in a set period.
• Stock-to-sales ratio – how much stock is held compared to actual sales.
• Sell-through rate – the percentage of received stock that gets sold.
• Backorder rate – the share of orders delayed due to stock unavailability.
• Supplier Quality Index (SQI) – a combined score reflecting supplier performance, including product quality and delivery accuracy.

In addition to KPIs, both parties also agree on terms and conditions (T&C), including payment timelines and responsibilities in the VMI agreement. With shared access to the retailer’s inventory list, suppliers can monitor stock movements in real time and plan replenishment.

Benefits of Vendor Managed Inventory

By now, you likely have a good grasp of how Vendor Managed Inventory (VMI) works. So, what are the real benefits for businesses? Here are some key advantages companies can gain from adopting VMI:

• Gives suppliers control over downstream decisions, helping streamline transportation and logistics.
• Builds stronger, long-term relationships between suppliers and retailers.
• Improves customer satisfaction by minimizing stockouts and reducing frustration.
• Promotes transparency by giving customers more visibility into product sourcing and production, increasing trust.

While VMI offers many benefits, companies should also consider potential drawbacks such as miscommunication, resistance to change, or unclear role definitions.

Drawbacks of Vendor Managed Inventory

As mentioned earlier, vendor-managed inventory (VMI) can boost factory productivity. However, that doesn’t mean it comes without challenges. Like any strategy, VMI has certain drawbacks that businesses should consider before implementation.

Here are some potential disadvantages of VMI:

• Reduced control: Since the supplier handles inventory decisions, the company has less direct control over stock levels and ordering timelines.
• Communication challenges: VMI depends on accurate, consistent communication and data sharing between both parties. Any breakdown in this flow can lead to inventory shrinkage or errors.
• Financial impact: Implementing VMI may involve high administrative costs, including software, analytics tools, and system integration, which could strain cash flow or divert funds from other business priorities.
• Supplier reliance: Heavy dependence on the supplier means that any issues on their side, such as late deliveries or incorrect demand forecasting, can disrupt the company’s operations.

Consider to look for workarounds to minimize the problems.

Implement HashMicro’s Vendor Inventory System for Effective Inventory Management

If your business is adopting a Vendor Managed Inventory (VMI) approach, having the right inventory system is critical.

HashMicro’s Inventory Management Software is built to support this model by giving both you and your suppliers better visibility and control over stock levels, whether the inventory sits in your warehouse or theirs.

With this system, suppliers can access accurate, up-to-date inventory data to make informed restocking decisions. At the same time, your team stays in the loop and avoids common VMI issues like stockouts, missed deliveries, or overordering.

Here’s how HashMicro’s system supports a VMI setup:

• Real-time inventory monitoring, so suppliers and buyers always see the same data
• Low stock alerts to help suppliers restock on time, without manual follow-ups
• Demand forecasting based on sales and usage history to guide smarter replenishment
• First-expiry, first-out (FEFO) tracking to sell older or perishable stock first
• Barcode scanning for fast, accurate receiving and stocktaking
• Internal stock request tracking, useful for multi-location businesses
• System integrations with accounting, sales, purchasing, and POS, keeping all inventory-related decisions aligned

By using HashMicro’s software to support VMI, companies can reduce miscommunication with vendors, cut down on delays, and keep shelves stocked with the right products at the right time.

Conclusion

Vendor Managed Inventory lets suppliers manage stock for retailers using real-time data and shared system access. It reduces stockouts, improves coordination, and helps maintain ideal inventory levels without constant back-and-forth.

If you’re planning to use VMI, HashMicro’s Inventory Management Software is the perfect tool to support it. It gives suppliers full visibility, while your team stays informed and avoids costly supply chain issues.

With features like stock alerts, barcode tracking, and sales-based forecasting, managing inventory becomes easier and faster. Don’t leave stock decisions to guesswork. Try the free demo and keep your shelves stocked effortlessly.

FAQ on Vendor Managed Inventory

• Does a VMI forecasting model account for promotions and seasonal demand?

  Yes. Modern VMI systems can integrate promotional schedules, seasonal trends, and even transport factors into their demand forecasts to adjust restocking plans accordingly.

• Can VMI reduce inventory shrinkage and excess carrying costs?

  Absolutely. By aligning stock levels with actual usage, VMI helps prevent overstock and minimizes loss from shrinkage, lowering storage costs and freeing up cash.

• How do you get started with a VMI program?

  To begin VMI, start by choosing which products to include and setting minimum/maximum stock thresholds. Then share inventory data with your supplier and agree on replenishment frequency and responsibilities.

• Who typically uses Vendor Managed Inventory?

  VMI is especially common in consumer-packaged goods, industrial parts, and large e-commerce businesses with many SKUs. Big retailers like Amazon, Walmart, and Home Depot use it, as do manufacturers managing critical components.