What is Vendor Managed Inventory (VMI) and What are the Benefits for an Ecommerce Business?

If your 3PL has a large storage capacity, you may consider using them to help store your inventory. This is what’s known as vendor-managed inventory (VMI). It’s a value-added service that is more common for larger companies whose products are manufactured in another country.  

Here are the ways VMI works and how it can be beneficial for an ecommerce brand.  

How Does Vendor Managed Inventory Work?  

Instead of the merchant getting products from the manufacturer, storing them, then shipping them to a fulfillment company, products go straight from the manufacturer to the fulfillment center.  

With VMI a brand will instruct their manufacturer (also known as a vendor) to ship products directly to their 3PL. Products are technically still owned by the manufacturer, so they will be shipped under the manufacturer’s name. The merchant can then buy inventory as they need from the manufacturer, even though the products are already being stored by their 3PL.   

Vendor managed inventory works the best for brands selling consumer packaged goods and other products that move through inventory quickly. Enterprise hardware, like security cameras or components for electronics, like cases and headsets, are other good candidates for VMI. The ideal scenario is to have products that won’t sit in inventory for a long time.  

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How is VMI Different from Other Inventory Management Methods?

Inventory management is a big task for any ecommerce business. Any business can receive product from their manufacturer and put it in a storage unit, or house it at their business before shipping it to the fulfillment provider. This requires a complex system of tracking to ensure you know the exact product counts that you’re storing, and that are with your 3PL. 

With VMI accurate inventory management gets a bit more complex but hopefully also a bit easier for the merchant to manage.  

The accuracy and ease of tracking vendor managed inventory all depends on the fulfillment provider’s (the vendor!) technical support—with a great warehouse management system (WMS) inventory tracking can be very simple. All parties should be able to see inventory levels in real-time and adjust accordingly. By having your 3PL manage inventory, it can take the burden off the merchant to keep up with product levels in storage.  

Considerations to make when choosing to have your 3PL manage your inventory:  

  • Reordering. Understanding when to order inventory is a tricky balance. Because order volume fluctuates throughout the year, storage capacity is also an issue, determining who reorders inventory is a key component to VMI success.  
  • Security. If there is any security breach, whether for the physical inventory or data within devices, who pays for that?  
  • Data tracking. It’s always important to have real-time inventory data, but even more so with VMI. The merchant needs to be able to have an accurate count of their products, at the end of the day they are still responsible for them.  
  • Bad product. If a shipment comes in of faulty or damaged products, is your 3PL responsible for checking it? Reworking it? Decide what happens in the contract and what the procedure will be so there’s no confusion.  

Industry insight! A VMI contract is much harder to break. VMI will increase the loyalty between merchant and 3PL. It’s a much harder system to step away from once it’s all set up. 

How Ecommerce Businesses Can Benefits from VMI 

Not all fulfillment providers will offer VMI to their customers. But there are some huge benefits ecommerce merchants can find in this service. Some include: 

  • Products are closer to the fulfillment process, which saves time getting them to the line, especially during peak season.  
  • Inventory is now not on your books, but it is still guaranteed for you when it’s ready to be purchased.   
  • Overall reduced costs! You’ll save on shipping (from storage unit to 3PL), and potentially have lower storage costs in general, depending on how much your 3PL charges you for the service.  
  • Tracking inventory is now simpler, because it’s all under one roof, within your 3PL’s WMS.  
  • Shipment receiving is smoother with your 3PL handling it. No ecommerce merchant needs to be an expert in all things shipping, let your professionals handle it if there are issues with your carrier.  

It’s worth mentioning that the manufacturer also benefits from VMI because they have more space to manufacture more products and also the guarantee of products being sold even after they leave their facilities. Smaller ecommerce companies may think they can’t pull something like this off, but if you have good relationships with your partners, it’s just a conversation away.  



If you are seeking fulfillment support that also comes with many value-added services and customized solutions (like VMI), reach out to DCL Logistics for a quote. We’d love to hear from you.