As customer expectations rise and supply chains grow increasingly intricate, businesses must find ways to optimize their inventory processes, reduce costs and satisfy customers—all at the same time. Two key strategies that have emerged to help companies achieve these goals are customer managed inventory (CMI) and vendor managed inventory (VMI). By combining one of these approaches with advanced inventory management technologies, businesses can gain real-time visibility into their inventory levels, streamline their supply chain operations, and build stronger and more collaborative relationships with suppliers.

In this article, we’ll explore the key differences between CMI and VMI, the benefits of each strategy, best practices for implementation, and how to choose the right approach for your business.

What Is Customer Managed Inventory?

CMI is a supply chain management strategy where the customer, usually a business, rather than its supplier takes responsibility for monitoring and managing its own inventory levels. This is actually a collaboration in which the customer uses some of its own tools and systems as well as technology provided by the supplier to track inventory in real time and place replenishment orders as needed.

CMI enables businesses to respond more quickly to changes in demand, optimize stock levels, and reduce the costs of carrying inventory that may become obsolete. The real-time data visibility provided by CMI systems improves businesses’ decision-making, as well as communication with their suppliers.

Key Takeaways

  • CMI is an inventory management strategy in which businesses control their inventory management processes using tools and systems provided by their suppliers.
  • CMI improves businesses’ inventory processes, lowers their inventory-related costs, and reduces inventory risks via capabilities such as automated replenishment and streamlined communication with suppliers.
  • VMI, or vendor managed inventory, is an alternative approach where suppliers take responsibility for managing their customers’ inventory.
  • To choose between CMI and VMI, determine how each aligns with a business’s unique circumstances and requirements.
  • Implementing best practices and leveraging advanced inventory management technologies can help businesses maximize the benefits of CMI or VMI.

Customer Managed Inventory Explained

With CMI, businesses typically use scanning tools, barcodes, or radio frequency identification (RFID) technology to monitor inventory levels and transmit the resulting data to their suppliers’ systems. In this scenario, the business customer sets minimum and maximum inventory thresholds. When stock falls below the predetermined minimum level, the system automatically generates a replenishment order. This automated process helps ensure that companies always have the right amount of inventory on hand, reducing the risk of stockouts or overstocking.

Though CMI offers numerous benefits, it also requires a strong commitment from both parties. Businesses must invest in the necessary technology and processes to accurately monitor and manage their inventory, while suppliers must provide reliable systems and support to enable seamless data integration and order fulfillment. The mix of customer-owned and supplier-provided inventory management technologies varies from one CMI engagement to another. But, typically, suppliers provide the essential technology for inventory monitoring and data exchange, while customers may deploy additional inventory management software if their specific business needs require it.

Regardless of the technology mix, when implemented effectively, CMI can foster a more collaborative and efficient supply chain, ultimately leading to increased customer satisfaction and business growth.

Vendor Managed Inventory Explained

VMI is also a collaborative inventory management strategy but, as its name implies, one in which the supplier assumes responsibility for maintaining and replenishing its customers’ inventory. With VMI, the supplier has access to customer inventory data and uses it to make proactive decisions about when and how much to restock, making sure that the customer has the right products in the right quantities at the right time.

In a VMI system, the supplier typically receives electronic data interchange (EDI) or real-time inventory updates from the customer, allowing it to monitor stock levels continuously. The supplier uses this data, along with agreed-upon minimum and maximum inventory thresholds, to generate replenishment orders and coordinate deliveries. By taking on the task of inventory management, the supplier can optimize stock levels, reduce the risk of stockouts, and improve overall supply chain efficiency. This approach also frees up customers’ resources, allowing companies to focus on their core business activities while benefiting from a reliably outsourced inventory management process.

CMI vs. VMI: Analyzing Distinctions in Inventory Management

Primary factors that go into a business’s decision to use either CMI or VMI include its industry, the size of the company, the complexity of its supply chain, and the resources at its disposal to manage inventory. CMI is often well suited for larger organizations with robust inventory management systems coupled with a desire for greater control over their stock levels. VMI can be an excellent choice for smaller businesses or those looking to simplify operations by leveraging their suppliers’ expertise.

Both approaches demand close collaboration between customer and supplier. While the nature of that collaboration differs in VMI and CMI, both require open communication, trust, and a willingness to work jointly to optimize inventory and improve supply chain efficiency.

Vendor Managed Inventory

With VMI, the supplier-customer collaboration focuses on the supplier taking responsibility for managing a business’s inventory and making decisions about when and how much to restock, based on shared data and preset targets. The customer must provide the supplier with access to inventory data and work with the supplier to set appropriate minimum and maximum stock levels. Some key characteristics of VMI are:

  • Supplier manages and owns the inventory until it’s used by the customer. This allows the customer to reduce its inventory carrying costs and minimize the risk of obsolescence.
  • Supplier decides when and how much to deliver based on data analytics and forecasts. The idea here is that the supplier’s expertise and resources optimize the customer’s inventory levels and ensure timely replenishment. Good demand forecasting systems play a crucial role.
  • Supplier monitors inventory levels, manages stock, and handles replenishment. Freed of these inventory tasks, a company can devote more time and resources to its core business activities.
  • Supplier assumes holding costs, potentially reducing customer’s inventory costs. VMI not only removes the value of inventory from a business’s balance sheet, it also eliminates some or all of a business’s need to build and maintain infrastructure and assign staff for managing inventory.
  • Approach enhances supply chain responsiveness by adjusting orders based on shared data. Real-time data sharing enables suppliers to quickly adapt to changes in demand, minimizing the risk of stockouts or overstocking.

Customer Managed Inventory

CMI involves collaboration centered around customer control over inventory management. Businesses monitor stock levels and decide when to place replenishment orders with suppliers, often using tools and systems provided by suppliers. The supplier must ensure that its systems integrate seamlessly with the customer’s processes and systems and be willing to provide appropriate support when needed. Key elements of CMI include:

  • Customer retains ownership and control of inventory. CMI allows businesses to maintain greater control over their stock levels and inventory management processes. Naturally, though, it comes with all the administrative and cost burdens of owning and managing inventory.
  • Customer decides when and how much to order based on their own forecasts. By leveraging their business and market knowledge, companies can build more accurate forecasts and make better-informed decisions about inventory replenishment. This is the key benefit businesses obtain in exchange for the greater effort and costs of CMI.
  • Customer gains greater autonomy. With CMI, businesses have a higher level of independence to decide how to manage inventory records, forecasting processes, and storage. They don’t rely on suppliers for replenishment choices.
  • Customer may incur higher holding costs but has control over ordering and pricing. This is CMI’s cost-benefit equation: higher inventory carrying costs but greater flexibility in managing stock levels and negotiating prices.
  • Approach offers speed in adjusting inventory levels according to real-time demand changes. By directly managing their inventory, businesses can respond more rapidly to shifts in market demand, minimizing the risk of stockouts or overstocking.
  • Approach has potential for better alignment with customer’s own business. CMI enables businesses to manage their inventory in a way that aligns closely with their specific goals, such as optimizing cash flow or prioritizing certain product lines.
CMI vs VMI Graphic
CMI and VMI differ as to whether a company or its supplier owns and manages inventory, but both aim to optimize a business’s inventory management through closer communication and greater trust.

Benefits of Customer Managed Inventory

CMI offers a range of benefits that help businesses optimize their inventory management processes, reduce costs, and improve overall supply chain efficiency. Here are 11 benefits of CMI that assist businesses in achieving those goals.

  • Simplified user experience: CMI systems often feature user-friendly interfaces and intuitive workflows, making it easier for businesses to monitor and manage their inventory. For example, a retail store using a CMI system with barcode scanning can reduce the time and effort required for accurate inventory updates.
  • Minimized overhead: In a CMI arrangement, at least some of the inventory management tools businesses use are provided by the supplier, reducing the overhead associated with maintaining dedicated systems for that purpose. This is particularly beneficial for small and midsize companies that may not have the resources to invest in inventory management software and IT staff. Larger companies, or those with more sophisticated or specific inventory management requirements, are likely to use more of their own technology and so wouldn’t gain as much from this benefit.
  • Decreased human error: CMI systems with automated data capture technologies, such as barcode scanning or RFID, reduce the risk of human error in inventory tracking. Minimizing manual data entry allows businesses to improve the accuracy of their inventory accounting records and avoid mistakes that can lead to stockouts or overstocking.
  • Automated replenishment based on customer inputs: CMI allows companies to set minimum and maximum inventory thresholds and to automatically trigger replenishment orders when stock levels fall below the minimum level. This way, businesses can keep the right amount of inventory on hand without constant manual monitoring.
  • Streamlined communication between customer and supplier: Suppliers in a CMI arrangement provide their customers with a platform for real-time data sharing, enabling more efficient communication and collaboration. For instance, if a business notices a sudden spike in demand for a particular product, it can inform the supplier through the CMI system. The supplier can then adjust its production and delivery schedules to accommodate increased orders.
  • Reduced reliance on suppliers: Businesses with greater control over inventory management reduce their reliance on suppliers for replenishment. With CMI, customers have the autonomy to make inventory decisions that align with their specific needs and goals rather than depending on a supplier’s recommendations.
  • Improved adaptability to fluctuating business environments: CMI enables companies to quickly adapt to changes in market demand or business priorities. For example, if a manufacturer experiences a sudden increase in orders due to a new product launch, it can easily update its inventory thresholds in the CMI system to ensure that it has sufficient raw materials to meet the higher demand.
  • Enhanced data accuracy: Because CMI systems remind companies to update their inventory data regularly, they tend to have more accurate and up-to-date information. Businesses can use that information to make better-informed decisions about inventory and supply chain operations.
  • Improved cash flow: By aligning their inventory levels with actual demand, businesses can reduce the amount of working capital tied up in inventory, which can improve cash flow.
  • Strengthened customer-supplier relationships: The collaborative partnership that CMI fosters can lead to stronger, more trusting relationships that benefit both parties.
  • Can be customized for unique business needs: CMI systems can be tailored to align a company’s inventory management processes with its business model, industry dynamics, and customer demand.

Benefits of Vendor Managed Inventory

Like CMI, VMI also offers advantages that can help businesses streamline supply chain operations, reduce costs, and improve customer satisfaction. But the VMI approach yields two overarching benefits that CMI can’t match: It lets companies focus more on their core competencies, and it leverages their suppliers’ expertise to improve inventory operations. Specific benefits of VMI include:

  • User-friendly operation: Similar to the simplified user experience offered by CMI, VMI systems are designed to be user-friendly. However, in VMI, the focus is on making it easy for suppliers to monitor and manage inventory levels at their customers’ locations. Suppliers use web-based portals or mobile applications to access their customers’ real-time inventory data, track performance metrics, and generate reports, simplifying the suppliers’ inventory management process.
  • Paperless inventory management: VMI lets suppliers and their customers go paperless by automating data capture and exchange between them. EDI or application programming interface (API) integrations support seamless sharing of inventory data, order information, and shipping notices, eliminating the need for manual paperwork and reducing the risk of errors associated with manual data entry.
  • Lower human error rates: VMI systems’ automation offers the same potential as CMI systems for reducing human error in inventory tracking and replenishment processes. Automated VMI systems similarly use barcodes and RFID to accurately monitor stock levels, then calculate reorder points and generate purchase orders following predefined parameters, ensuring that the right products are ordered at the right time and in the right quantities.
  • Reduced operational costs and risks: While CMI offers to minimize overhead costs, VMI helps businesses reduce operating expenses and risks by shifting inventory management responsibilities to suppliers. Suppliers can leverage their expertise and economies of scale to optimize customers’ inventory levels and reduce their overall supply chain costs. This allows businesses to free up working capital that can be allocated to other areas.
  • Enhanced inventory transparency: VMI gives suppliers real-time visibility into their customers’ stock levels and consumption patterns. This transparency enables suppliers to make informed decisions about production planning, inventory allocation, and delivery schedules, ultimately leading to improved supply chain responsiveness and reduced stockouts. In contrast, CMI provides inventory transparency primarily to the customer.
  • Strengthened supplier-buyer relationships: Similar to CMI, VMI fosters a collaborative partnership between suppliers and their customers as both parties work together to sharpen inventory management and improve supply chain performance. But the nature of the collaboration is different: With CMI, the customer takes responsibility for inventory management; with VMI, suppliers have that responsibility. In either case, greater collaboration should lead to increased trust, clearer communications, and a more strategic approach to supply chain management. For example, suppliers and their customers can jointly develop key performance indicators (KPIs) and regularly review performance data together to identify areas for improvement.
  • Improved forecasting accuracy: VMI has the potential to generate more accurate demand forecasts than businesses can achieve alone. Suppliers can combine their own market insights and expertise with their access to real-time customer sales and inventory data to better anticipate future demand. Then, based on their forecasts, they can adjust their production and inventory plans more rapidly.

8 Key Considerations When Choosing Between CMI and VMI

The choice between CMI and VMI hinges on a business’s unique circumstances, goals and inventory management priorities . By weighing the potential benefits and drawbacks of each approach in the context of the following eight factors, companies can make an informed choice.

1. Control and ownership: Perhaps foremost among the range of considerations, businesses must decide how much control they want to maintain over their inventory management processes. CMI allows companies to retain full ownership and control, which may be preferable for businesses with strict quality control requirements or those operating in heavily regulated industries. On the other hand, because VMI enables businesses to transfer the responsibility of inventory management to their suppliers, it may prove more beneficial for resource-constrained companies or those with limited inventory management expertise that nonetheless want to improve their supply chain efficiency. VMI may also allow a business to scale its operations more easily than if it were managing inventory by itself.

2. Responsibilities and workload: The distribution of responsibilities and workload between a business and its suppliers is a crucial consideration. With CMI, the business retains control over most inventory management tasks, such as monitoring stock levels, placing orders, and managing inventory records. This approach is suitable for companies with the resources and expertise to handle these responsibilities effectively. However, it also means that the business will have a higher workload related to inventory management. In contrast, VMI shifts most of these responsibilities to the supplier, reducing effort for the business.

3. Collaboration and relationship with suppliers: The nature of collaboration and trust between a business and its suppliers leads to subtle distinctions when choosing between CMI and VMI. CMI requires a strong collaborative relationship, as customers must work closely with their suppliers to seamlessly integrate the suppliers’ technology and processes with the customers’ operations. VMI, however, demands an even higher level of trust and collaboration, as the customer’s business will rely on its supplier to make critical inventory management decisions on its behalf. Companies with long-standing, reliable supplier relationships may be better suited for VMI, while those with newer or less established partnerships may prefer CMI.

4. Industry and market dynamics: The specific characteristics of a business’s industry and target market can significantly influence the choice between CMI and VMI. Companies operating in industries with stable, predictable demand patterns and longer product lifecycles may find CMI more suitable, as they can effectively manage their inventory based on historical data and forecasts. Businesses in industries with volatile demand, short product lifecycles, or frequent product updates may benefit from VMI, as suppliers can react more quickly to changing market conditions when they are directly observing them.

5. Technology and infrastructure requirements: CMI often requires businesses to invest in new technology to accurately track and manage their inventory. Therefore, companies with limited IT resources or outdated systems may find it challenging to implement CMI effectively. VMI, on the other hand, shifts the technology burden to the supplier, making it a more attractive option for businesses with limited IT capabilities.

6. Risk management and flexibility: Because businesses retain control over their inventory management processes under CMI, they see changing market conditions first and can, therefore, more rapidly adjust their strategies in response. This level of flexibility mitigates inventory-related business risks and may be essential for companies operating in volatile markets or those with frequently changing product lines. VMI, on the other hand, transfers some risk to the supplier, which becomes responsible for ensuring adequate stock levels and managing potential supply chain disruptions. While offering some flexibility, VMI may inhibit a business’s adaptability because it’s the supplier, not the customer, that monitors sales and inventory data.

7. Inventory visibility and transparency: CMI provides real-time, granular visibility into inventory levels, which may be crucial for businesses with complex supply chains or those operating in fast-paced, dynamic markets. VMI also provides visibility, but not always with the same depth and detail for the customer business.

8. Cost and resource allocation: There’s a lot to weigh when it comes to costs and resources. CMI sometimes requires businesses to invest in new technology, infrastructure, and people to manage their inventory, which can be costly. However, CMI also enables businesses to retain control over their inventory costs and negotiate better prices with suppliers. VMI shifts much of the cost and resource burden to the supplier, allowing companies to cut down on their inventory management expenses and allocate resources to other areas of the business. But companies may have less control over their inventory costs and become subject to their suppliers’ pricing structures.

How to Maximize Results With CMI or VMI

To maximize the benefits of CMI or VMI, businesses must adopt a set of best practices that foster collaboration, transparency, and continuous improvement. Whichever approach a company chooses, a commitment to the following eight practices will help it optimize inventory management through the kind of data-driven decision-making essential for long-term success.

1. Establish clear communication and collaboration: As has been emphasized throughout this article, clear communication and close collaboration are essential to both CMI and VMI. Companies should establish clear communication channels, including regularly scheduled meetings, real-time data-sharing platforms, and instant messaging, to ensure that all parties are aligned on goals, expectations, and performance metrics. For example, setting up a joint performance dashboard that tracks KPIs can help foster a shared understanding of progress and awareness of areas in need of improvement.

2. Implement robust inventory management practices: Regardless of whether a business chooses CMI or VMI, it will need solid inventory management practices, including accurate inventory counts using lot or serialized tracking, setting appropriate safety stock levels, and regularly reviewing and adjusting replenishment strategies based on historical data and demand forecasts. Businesses should also consider implementing inventory optimization techniques, such as ABC analysis or economic order quantity, to further improve efficiency and reduce costs.

3. Ensure seamless data sharing and integration: Integration between the business and its suppliers is vital to both CMI and VMI. Companies should invest in technology solutions that enable real-time data exchange, such as EDI, or make extensive use of APIs. This provides all parties with access to accurate, up-to-date information on inventory levels, demand patterns and replenishment needs, permitting more informed decision-making and faster response times.

4. Monitor performance and drive continuous improvement: To maximize the benefits of either inventory management approach, businesses must constantly promote iterative improvement. This involves continuously tracking KPIs, such as inventory turnover, stockout frequency, and order fill rates, and regularly reviewing performance data with suppliers. By analyzing this data and identifying trends or issues, businesses can implement targeted improvement initiatives.

5. Maintain flexibility and adaptability: Business today moves and changes fast. Flexibility and adaptability are essential for success. Businesses should design their CMI or VMI systems to be flexible enough to accommodate changes in demand, product mix, or market conditions. This may involve periodically reviewing and adjusting inventory parameters, such as reorder points or safety stock levels, or implementing contingency plans to mitigate potential supply chain disruptions.

6. Develop skills and expertise: To fully leverage the benefits of CMI or VMI, businesses should invest in developing the necessary skills and expertise. This could mean, for example, providing more extensive training on inventory management best practices, data analysis, or supplier collaboration. By building a strong foundation of knowledge and skills, companies can more effectively implement and optimize their CMI or VMI programs, leading to better results and a more resilient supply chain.

7. Nurture supplier-customer relationships: Strong, mutually beneficial relationships between customers and suppliers are requisite for both CMI and VMI. Businesses should view their suppliers as strategic partners and work to build trust, transparency and shared goals. This suggests sharing information way beyond inventory data—think business objectives, market trends and performance expectations—as well as collaborating on joint improvement initiatives or innovation projects. By nurturing these relationships, businesses can create a more collaborative and responsive supply chain that creates greater value for both parties.

8. Conduct regular reviews and strategic planning: To ensure the ongoing success of their CMI or VMI programs, businesses should assess the performance and effectiveness of the program on a periodic basis, identify areas for improvement, and set or reset goals and priorities for the future. By regularly refining the strategic plan, businesses can better adapt to changing market conditions and derive greater value from inventory management.

Optimize Inventory Management With NetSuite

CMI and VMI both offer numerous potential benefits in the area of inventory management, but businesses may find it challenging to implement and optimize either approach. That’s because so many companies still have limited visibility into real-time inventory data and difficulty integrating data from multiple systems—not to mention the complexity of managing inventory across various locations and channels. Furthermore, businesses still struggle to accurately forecast demand, set optimal reorder points, and ensure timely replenishment.

To overcome these challenges and realize the benefits of CMI or VMI, businesses can turn to a comprehensive inventory management solution like NetSuite Inventory Management. NetSuite offers a cloud-based, unified platform that provides real-time visibility into inventory levels, automates key processes and enables seamless collaboration with suppliers. With real-time inventory tracking, automatic reorder point calculations, and advanced demand forecasting, NetSuite empowers businesses to optimize their inventory management processes, reduce costs, and improve customer satisfaction. By leveraging NetSuite’s powerful capabilities, businesses can streamline their CMI or VMI programs, drive continuous improvement, and achieve long-term success in today’s competitive marketplaces.

CMI and VMI are two powerful inventory management strategies that businesses can leverage to optimize their inventory processes, reduce costs, and improve supply chain efficiency. By carefully evaluating important factors, such as ownership and control, collaboration, technology, and risk management, companies can choose the approach that best aligns with their unique needs and goals. Implementing best practices and leveraging robust inventory management technology can further help businesses maximize the benefits of CMI or VMI.

Award Winning
Cloud Inventory

Free Product Tour(opens in a new tab)

Customer Managed Inventory FAQs

How to maximize results with CMI or VMI?

To maximize results with either customer managed inventory (CMI) or vendor managed inventory (VMI) approaches, businesses should implement best practices for inventory management. These include establishing clear communications and close collaboration, implementing seamless data sharing and integration, monitoring performance, maintaining flexibility, developing inventory-related skills and expertise, nurturing supplier relationships, and conducting regular reviews and strategic planning.

What is customer managed inventory?

Customer managed inventory (CMI) is a supply chain management strategy where the customer, rather than the supplier, takes responsibility for monitoring and managing its own inventory levels. In typical CMI arrangements, the customer business uses tools and systems provided by the supplier, especially if it is a smaller organization with conventional inventory management requirements. The more complex a business’s inventory requirements, or the larger the organization, the more likely the business will have inventory management technologies of its own and integrate those with its supplier’s system.

What is the difference between VMI and CMI?

The main difference between customer managed inventory (CMI) and vendor managed inventory (VMI) is which entity takes responsibility for managing the business’s inventory. With VMI, the supplier is responsible for monitoring and replenishing a customer’s inventory, while with CMI, the business manages its own inventory using tools provided by the supplier.

What is customer-based inventory management?

Customer-based inventory management, also known as customer managed inventory, is an approach in which the customer controls its inventory management processes using tools and systems provided by the supplier to monitor stock levels and place replenishment orders as needed.

What is CMI inventory?

CMI inventory refers to the stock that is managed by the customer under a customer managed inventory (CMI) system. In this approach, the customer is responsible for monitoring inventory levels and placing replenishment orders using tools and systems provided by the supplier.