Abstract: This paper analyzes the limitations of vendor managed inventory (VMI) and shows that improvement can be made if the thirdparty logistics involve the inventory management. To analyze the effectiveness, based on the economic order quantity (EOQ), a mathematical model is developed to describe such an inventory management mode by taking the transportation cost and safety stock into account. With this model, analysis shows that the involvement of VMI by thirdparty logistics can reduce the suppliers inventory and logistics cost, and increase the profit of both the supplier and retailer. However, with the increase of the order, inventory, and logistics cost, the profit of both the supplier and retailer reduces. Examples are used to verify the results.