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Updated: Nov 26, 2018

VMI can provide significant savings for the supply chain over RMI in almost all scenarios capturing nearly all benefits. VMI can be particularly beneficial for products with high demand variance or high outsourcing cost. In the last decade, many companies have changed their supply chain structure from retailer managed inventory (RMI) to vendor managed inventory (VMI) in which the vendor decides the quantity to be stocked at the retail location(s).

In a true VMI setting, the supplier has the freedom to plan its own production and decide the replenishment schedules as long as the agreed customer service levels are met. VMI is often implemented with minimum and maximum levels for inventory and the vendor is responsible in maintaining those. VMI shifts responsibility in decision making of the replenishment schedule and inventory management from the customer to the supplier.

The ability to execute VMI effectively can be seen as an organizational capability, which on other hand is a competitive advantage. A shift from RMI to VMI can involve different changes involving the implementation of new IT systems to enable the vendor to access point-of-sale data, development of trust between vendor and retailer, and the role of vendor’s sales force. It also requires a reconsideration of the supply chain contracts. Analyzing and understanding how supply chain contracts perform under VMI (and RMI) are important for retailers (online & bricks) and supply chain professionals. Some popular coordinating supply chain contracts are as presented below:

To enable coordination, the supply chain resorts to contracts. In general, the