A means of optimizing Supply Chain performance in which the manufacturer is responsible for maintaining the distributor’s inventory levels. The manufacturer has access to the distributor’s inventory data and is responsible for generating purchase orders. To further define it, let’s look at 2 business models:
When a distributor needs product, they place an order against a manufacturer. The distributor is in total control of the timing and size of the order being placed. The distributor maintains the inventory plan.
The manufacturer receives electronic data (usually via EDI or the internet) that tells him the distributor’s sales and stock levels. The manufacturer can view every item that the distributor carriers as well as true point of sale data. The manufacturer is responsible for creating and maintaining the inventory plan. Under VMI, the manufacturer generates the order*, not the distributor.
*Note: VMI does not change the "ownership" of inventory. It remains as it did prior to VMI.
When the supplier places inventory at a customer’s location and retains ownership of the inventory. Payment is not made until the item is actually sold. A VMI relationship may or may not involve consignment inventory.