Vendor-Managed Inventory means that the supplier and not the customer initiates the replenishment of the customer's inventory. The following figure shows the usual business process in case the customer controls his inventory on his own.
In contrast, the following figure shows the equivalent business process under Vendor-Managed Inventory.
Here, the customer only transmits the inventory and demand data while the supplier is responsible for the height of the inventory. The supplier must have up-to-date information about the customer's inventory position and the actual demand at any time. However, this exchange of information may be critical, as many customers are members of multiple supply networks and may be reluctant to provide information to their suppliers.
It is quite often not noticed that the central control and the improved information offer the opportunity of a true optimization of inventory, particularly of the safety stock. The supplier can now decide on the optimal allocation of safety stock in the supply network along the lines discussed above. He does not have this opportunity with local control.