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A vendor managed inventory (VMI) is a process whereby a supplier maintains an inventory for a retailer by generating orders for the retailer based on its demand information. In this relationship, the supplier is responsible for maintaining the retailers’ inventory levels and transportation and transaction costs. The performance measurements that are associated with the theory of constraints (TOC) have been widely advocated as a mechanism of linking operational objectives to the global goals of an organization. In this paper, we use a case study of the Procter & Gamble to illustrate the application of TOC in VMI. The results show that the quality of service and the inventory level can be improved.