Vendor managed inventory (VMI) is an arrangement where your supplier, not you, decides when and how much to restock in your shop. It counts your stock or reads your sales, then tops each line up to a maximum you agreed. You stop writing orders, and the supplier plans from your real sales.
This guide shows how VMI runs, who owns the stock, what the agreement must say and who it suits. A mini-mart in Kumasi, Ghana, is worked through in cedis, with a check that catches a supplier's errors from your own till.
How vendor managed inventory works
VMI runs on two agreed numbers per product, a minimum and a maximum, and a regular visit or data report. At each review, the supplier tops every line back up to its maximum.
- Agree the levels. Set a minimum and a maximum for each product, in days of sales or in units.
- Share the figures. The supplier's rep counts the shelf and store at each visit, or you send stock and sales figures before it.
- Work out the top-up. For each line, the top-up is the maximum less the stock on hand.
- Deliver. The supplier delivers the top-up, or leaves it from the van on the spot.
- Check and pay. You check the goods against the delivery note and pay on the agreed terms.
- Review the levels. Every few months, both sides reset the minimum and maximum to recent sales.
The van version has a name in public health supply. The USAID Logistics Handbook calls it a delivery truck or topping-up system, and says it can also be called VMI. The team assesses the stock at each facility and leaves enough to bring each product up to its maximum.
The handbook's order rule is the one every max-min system uses: maximum stock quantity less stock on hand. Because the van fills the order on the spot, the lead time is zero, which lowers both the minimum and the maximum.
Large retail chains share the same figures by electronic data interchange (EDI) from an ERP system. A small shop shares a weekly stock report, or lets the rep count.
Who owns the stock under VMI
VMI decides who manages your stock, not who owns it. In most VMI deals you buy what the supplier delivers; in some, the supplier keeps ownership and you pay only for what sells.
| Arrangement | Who decides the restock | Who owns stock on your shelf | When you pay |
|---|---|---|---|
| Ordinary buying | You | You | On delivery, or on credit |
| VMI | The supplier | You | On delivery, or on credit |
| VMI on consignment | The supplier | The supplier, until it sells | For what has sold |
| Consignment | You, with the supplier's agreement | The supplier, until it sells | For what has sold |
Agree ownership in writing, because it decides who carries unsold and damaged stock. The rules for the last two rows are in consignment inventory.
A worked example: VMI at a mini-mart in Kumasi
For example, a mini-mart in Kumasi, Ghana, agrees VMI with its soft drinks distributor. The van comes every Monday, counts each line and tops it up to its maximum, and the mini-mart pays on delivery. The figures are illustrative.
The levels follow the handbook's rules. The review period is 7 days and the lead time is zero, because the van restocks on the spot.
- Safety stock: at least half the review period, so 3.5 days of sales.
- Minimum: lead time stock plus safety stock, so 0 + 3.5 = 3.5 days.
- Maximum: the minimum plus the review period, so 3.5 + 7 = 10.5 days.
| Product | Daily sales | Minimum (3.5 days) | Maximum (10.5 days) | Counted | Top-up | Cost each | Invoice |
|---|---|---|---|---|---|---|---|
| Cola, 500 ml | 24 | 84 | 252 | 70 | 182 | 5.00 | 910.00 |
| Water, 1.5 l | 18 | 63 | 189 | 70 | 119 | 4.00 | 476.00 |
| Energy drink, 330 ml | 6 | 21 | 63 | 25 | 38 | 9.00 | 342.00 |
| Total | 1,728.00 |
Cola ended the week at 70 bottles, below its minimum of 84: it sold 182, against the 168 its levels expect. If that happens again, both sides should raise its levels.
The check that keeps the supplier honest
Each top-up should equal what you sold since the last visit, because the van left every line at its maximum. For cola, 252 − 70 = 182.
Compare it with your till each week. If the till shows 170 bottles of cola sold, 12 bottles are missing: theft, breakage or a miscount by the rep.
Without VMI, ordering by phone with a 3-day delivery, the same rules give a minimum of 6.5 days and a maximum of 13.5 days. VMI's top-up on the spot takes the lead time out of both, and the mini-mart writes no orders at all.
What to put in a VMI agreement
A VMI agreement must fix the levels, the visits and the money before the first top-up. These are the ten points to settle.
| Term | What to settle |
|---|---|
| Products and levels | A minimum and a maximum for each product, by its code (SKU) |
| Visits | The day and how often, and who counts |
| Data | Which figures you share, and how often |
| Ownership and payment | Bought on delivery, on credit for a set number of days, or on consignment |
| Service level | For example, no line below its minimum at a visit, and what happens when one is |
| Extra deliveries | When you may call for a drop between visits |
| Returns | Damaged, expired or slow stock taken back on the van |
| Level reviews | How often the levels change, and who must agree |
| Prices | Whose price list applies, and the notice before a change |
| Ending the deal | The notice each side gives, and what happens to stock above the maximum |
The service level and the level reviews matter most. A supplier paid on what it delivers gains from high levels, so the shop must agree every change.
Does vendor managed inventory work? The evidence
VMI cuts stockouts when the supplier visits reliably and the levels fit real sales. Some of the best-documented evidence comes from public health supply in Africa, where it was tested at scale.
In Senegal, audits in 2011 found injectable contraceptives out of stock 43% of the year at facilities, and implants 83%. The Informed Push Model then had contracted logisticians restock facilities every month, and facilities paid only for what they had sold.
During the pilot in Pikine, from February to July 2012, stockouts ended at all 14 public health facilities. After it spread to the 140 public facilities of the Dakar region, stockout rates fell below 2% (Daff and others, Global Health: Science and Practice, 2014).
The authors built it on Zimbabwe's Delivery Team Topping Up, which they call a vendor managed inventory model. The USAID handbook describes its trucks visiting 1,400 facilities every quarter to top them up to their maximum.
Measure your own results the same way: count how often a line is empty, with the stockout rate, before VMI and after.
What VMI gives you
- Fewer stockouts, if the visits come on time.
- No ordering work: the rep counts and works out the top-up.
- Lower levels, because a top-up on the spot needs no stock to cover a delivery wait.
- Damaged and expired goods leave on the van, which the handbook lists as an advantage.
- A supplier who sees your real demand, and plans its own stock from it.
What can go wrong
- The van is a single point of failure. The handbook warns that if the truck breaks down, the whole system breaks down.
- Levels set too high. A supplier paid on deliveries gains from a full store room; you pay for it.
- Wrong figures. A rep's miscount or late data puts too much or too little on the shelf.
- Dependence on one supplier. Its price rises and stockouts become yours.
- Less shelf for rivals. A supplier filling the shelf to its own maximum leaves less room for other brands.
Who vendor managed inventory suits
VMI suits fast, steady sellers from a supplier that already sends vans or reps. It suits slow, seasonal or price-shopped goods badly.
| VMI fits | VMI fits badly |
|---|---|
| Soft drinks, water, bread, milk and other lines sold every day | Slow or seasonal lines |
| One main supplier per category | Many small suppliers with a few lines each |
| Pharmacies and clinics with one main distributor | Goods you buy each week from whoever is cheapest |
| Makers buying the same raw materials every week | One-off or made-to-order materials |
| Shops that record every sale, so the top-up can be checked | Shops that can't share accurate stock or sales figures |
Start with one supplier and one category for three months. Keep the deal if the stockouts fell and the top-ups matched your sales.
How to run vendor managed inventory with ArmPOS
ArmPOS doesn't connect to suppliers' systems, so VMI with ArmPOS runs on shared reports and recorded deliveries. These steps come from the Help center's guides.
- Make the minimum each product's Stock Alert. Product Quantity Alerts then lists any line at or below it (Reports to check every day). The bell, and push or email where each person turns them on, warn you between visits (Get alerts on your phone).
- Send the supplier your figures before each visit. Export the Stock Report for the warehouse and the week's Product sales report with EXCEL (Stock reports, Sales reports).
- Record each top-up as a purchase. Choose the supplier and the warehouse, check the quantities against the delivery note, and leave Status on received (Record a purchase).
- Pay on the agreed terms. Create Payment records it, and Reports › Suppliers Report shows what you still owe (Pay your suppliers).
- Check top-ups against sales. Set the Product purchases report beside the Product sales report for the same week (Customer and supplier reports).
- Watch for stock building up. The Stock Aging Report and the Dead Stock Report show lines the supplier sends faster than you sell them.
ArmPOS's webhooks send only a test message today, so share figures by export, not a live feed (Webhooks). On consignment terms, record the stock as consignment inventory explains.
Frequently asked questions
What is an example of vendor managed inventory?
A soft drinks distributor whose van counts a shop's stock every week and tops each line up to an agreed maximum. Senegal's monthly restocking of contraceptives at health facilities is a larger one.
Who owns the inventory in VMI?
Usually the shop, from the moment the supplier delivers. Some VMI deals run on consignment, and then the supplier owns the stock until it sells.
What is the difference between VMI and consignment inventory?
VMI decides who manages the restock; consignment decides who owns the stock. A deal can be either one, or both.
What are the disadvantages of VMI?
You depend on one supplier's visits and honesty, and a supplier paid on deliveries gains from high levels. Agree the levels in writing and check every top-up against your sales.
Pick the supplier whose rep already visits you most, and propose a minimum and maximum for each of its lines. To share stock and sales figures and check every top-up, create a free ArmPOS account.
