Vendor Managed Inventory: Lessons from Amazon, Walmart, and Home Depot to Cut Stockouts and Boost Efficiency

Today, 80% of the top 50 suppliers and 66% of the top 100 distributors use Vendor Managed Inventory (VMI) programs—employed by giants like Walmart, Home Depot, and Amazon—to manage stock efficiently and reduce out-of-stocks. But how exactly does VMI work, and what can smaller brands learn from it?

What is VMI?

Vendor Managed Inventory (VMI), also known as Supplier Managed Inventory, is an inventory strategy where suppliers (usually manufacturers) take on the responsibility of monitoring and restocking their products directly at the distributor’s site. It’s often an AI-powered approach, allowing for real-time data and optimized supply levels. You can read about it in-depth here.

Even if your brand isn’t on the scale of Walmart or Amazon, here is how your brand can start adopting VMI strategies:

Step 1: Know Your Sell-Through Rates

Understanding how fast products sell within a set period (usually monthly or quarterly) is foundational for managing inventory effectively. To calculate your sell-through rate, divide the number of products sold by the number of products received from the manufacturer, then multiply by 100 to get a percentage.

Accurate sell-through rates help you avoid costly stock issues—whether overstocking or under stocking. For instance, ordering too much of a slow-selling item can result in surplus inventory costs, while under ordering a popular product may lead to missed sales. If data is scarce, you can supplement it with sources like SPINS or distributor-provided sell-through data.

Step 2: Build Predictive Models in a Spreadsheet

Once you have a solid understanding of your sell-through rates, use this data to develop predictive models that can forecast future sales patterns across your distribution points. Predictive modeling helps you allocate stock where it’s needed most, reducing overstocking and minimizing the risk of stock outs.

The accuracy of these models relies heavily on the quality of the data collected in Step 1. Here are some practical steps to improve your predictive modeling process:

• Leverage Real-Time Inventory Management Tools: Tools that provide real-time visibility into inventory help you spot trends as they happen. Create a monthly seasonality curve in a spreadsheet
• Incorporate External Data: Enrich your model by integrating other data sources and noting seasonal trends like Black Friday and holidays.
• Adjust Models Regularly: Consumer demand can shift quickly, so revisiting your models periodically ensures your forecasts stay relevant. Updating models with recent data helps keep your projections accurate and responsive to market changes.

By combining sell-through data with real-time insights and external variables, predictive models can help you stay ahead of demand, allocate stock efficiently, and improve overall inventory health.

Step 3: Determine Automated Reorder Points

The best way to set up automated reordering points is to calculate the days of inventory you have on hand for each supplier. Then, establish a "safe zone" threshold and a "hazard zone" that indicates when you're at risk of stock outs. Make this "hazard zone" color-coded so you can easily spot accounts that are at risk of going out of stock. 

Key Considerations for Automated Reordering

• Avoid Overstocking: Automation doesn’t mean setting and forgetting. Regularly review reorder points to prevent over ordering. Overstocking ties up cash flow and risks obsolescence, especially with perishable or trend-driven items.
• Account for Promotions and Seasonality: If you’re planning promotional offers or gearing up for seasonal demand spikes, adjust reorder points accordingly.
• Fine-Tune Your Reorder Triggers: Factors such as lead time, supplier performance, and warehouse capacity should all be considered when setting reorder points.

The best way to put all these systems together is through automation. Pantry AI offers the cutting-edge tools you need to stay ahead of demand, eliminate stockouts, and build stronger relationships with your retail partners. Don’t leave your inventory to guesswork—let Pantry AI bring the precision and efficiency of automated, data-driven management to your business. Click here to see how Pantry AI can simplify your processes and drive real growth.