The practice that the supplier manages the inventory levels and purchases of the materials supplied to a customer. An example of the vendor-managed inventory is for the management of office or maintenance supplies by a supplier coming into the customer facility once per week to visually check stock levels and place re-supply orders. Other examples of VMI include electronic component suppliers having remote access to a customer's inventory management and MRP system and producing and automatically shipping to meet the customer's production schedule.

Vendor-managed inventory reduces internal costs associated with planning and procuring materials and enables the vendor to better manage the inventory through higher visibility to the supply chain. Vendor-managed inventory may be owned by the vendor (consignment inventory) or the customer.