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# Vendor-Managed Inventory

## Definition

A supply chain coordination arrangement in which the supplier takes
responsibility for maintaining stock levels at the buyer's location,
using shared inventory data to trigger automatic replenishment. Payment
occurs at point of consumption rather than delivery. The buyer surrenders
operational control over replenishment in exchange for reduced
administrative burden and improved demand signal quality.

## Source

Coordination Mechanisms in Modern Supply Chains, §Vendor-Managed Inventory

## Supply Chain Domain

Coordination

## VSM Assignment

S2 — VMI is a formal coordination mechanism that assigns the replenishment
function to the party best positioned to perform it. It reduces oscillation
(the bullwhip) by giving the upstream party direct visibility of
consumption rather than batched orders.

## WoN Concept

Division of Labour — VMI is an application of Smith's division of labour
principle at the inter-firm level. The inventory management function —
previously split between buyer (demand tracking) and supplier (order
fulfilment) with coordination friction between them — is consolidated
with the supplier, who has the information and capability to perform it
most efficiently. The functional specialisation reduces transaction costs
and improves the quality of the upstream demand signal, mirroring Smith's
argument that specialisation improves output quality and reduces waste.
