The problem of reducing production costs is one of the operational goals and strategies for most manufacturing companies. In real-world production systems, because of process deterioration or other factors, the production of defective items is inevitable. Sometimes in a practical production environment, we can rework and repair imperfect items and production inventory costs are reduced as a result. Vendor-managed inventory (VMI) is an inventory management policy with continuous replenishment in which the vendor is responsible for the buyer’s inventory management. In this paper an economic production quantity (EPQ) model with imperfect reworking of unhealthy quality items produced is discussed. The overall costs of these inventory systems before and after implementing VMI are calculated. At the end, numerical examples are provided and sensitivity analysis is performed to investigate the effects of cost parameters on the optimal lot size, the shortage and the total cost. The results illustrate the cost reduction after implementing the VMI policy.