Vendor-Managed Inventory: The Mistakes Organisations Make When Setting It Up

Vendor-managed inventory (VMI) transfers the replenishment decision from the buyer to the supplier. The supplier monitors stock levels -- often through an electronic data link -- and initiates replenishment orders when inventory falls below an agreed trigger point. In 2022, with purchasing teams stretched thin by labour shortages and supply volatility high, VMI has appeal: it reduces the administrative burden of ordering frequently-used items and can improve service levels on high-velocity stock.

But VMI is not a set-and-forget solution. The mistakes organisations make when setting up VMI tend to cluster around four themes.

The Four Clusters of VMI Setup Mistakes

1. Mistake cluster 1: Launching VMI without defining performance standards. VMI moves the replenishment decision to the supplier, but it does not remove the buyer's interest in the outcome. Before launch, agree in writing: the minimum service level (what percentage of triggered replenishments must arrive within the agreed lead time), the maximum inventory value the supplier is authorised to hold in the buyer's facility, and the data-sharing protocol (what stock data the supplier receives, at what frequency, and through what channel). Without these, the supplier optimises for its own convenience, not the buyer's service level.

2. Mistake cluster 2: Applying VMI to the wrong items. VMI works best for high-volume, stable-demand items with a reliable supplier relationship and predictable lead times. It works poorly for items with highly variable demand, items approaching end-of-life, or items where the supplier is also supplying your competitors and may prioritise allocation away from you when supply is tight. In 2022, many suppliers are under allocation pressure. VMI agreements do not protect you from being deprioritised; explicit contractual allocation commitments do.

3. Mistake cluster 3: Losing visibility into your own inventory. One of the risks of VMI is that the buyer stops monitoring inventory as closely as before, on the assumption that the supplier is managing it. This is a mistake. The buyer must retain independent visibility into stock positions, ideally through a system integration that mirrors the supplier's view. If the supplier's VMI system goes down, if the data link fails, or if the supplier makes a replenishment decision that does not reflect actual consumption, the buyer needs to know.

4. Mistake cluster 4: Treating VMI as a procurement relationship, not a partnership. VMI requires a higher level of trust and information sharing than a standard purchase-order relationship. Suppliers who receive demand data need confidence that the data is accurate and that the relationship is stable. Buyers who cannot share forward-looking demand signals -- because they do not have them or are not willing to share them -- will get less from VMI than buyers who treat the supplier as a planning partner.

XNM helps public-sector and capital-project organisations build procurement frameworks that balance efficiency with supply risk management. Reach out to XNM's procurement, sourcing & contract management team to discuss whether VMI is right for your supply base.