diff --git a/README.md b/README.md
index 8617c6c8be..7ecbe7f277 100644
--- a/README.md
+++ b/README.md
@@ -91,6 +91,12 @@ docker compose -f docker-compose.prod.yml up -d
 
 ### Option 4: Manual Setup
 
+**Requirements:**
+- [Bun](https://bun.sh/) runtime
+- PostgreSQL 12+ with [pgvector extension](https://github.com/pgvector/pgvector) (required for AI embeddings)
+
+**Note:** Sim Studio uses vector embeddings for AI features like knowledge bases and semantic search, which requires the `pgvector` PostgreSQL extension.
+
 1. Clone and install dependencies:
 
 ```bash
@@ -99,20 +105,43 @@ cd sim
 bun install
 ```
 
-2. Set up environment:
+2. Set up PostgreSQL with pgvector:
+
+You need PostgreSQL with the `vector` extension for embedding support. Choose one option:
+
+**Option A: Using Docker (Recommended)**
+```bash
+# Start PostgreSQL with pgvector extension
+docker run --name simstudio-db \
+  -e POSTGRES_PASSWORD=your_password \
+  -e POSTGRES_DB=simstudio \
+  -p 5432:5432 -d \
+  pgvector/pgvector:pg17
+```
+
+**Option B: Manual Installation**
+- Install PostgreSQL 12+ and the pgvector extension
+- See [pgvector installation guide](https://github.com/pgvector/pgvector#installation)
+
+3. Set up environment:
 
 ```bash
 cd apps/sim
 cp .env.example .env  # Configure with required variables (DATABASE_URL, BETTER_AUTH_SECRET, BETTER_AUTH_URL)
 ```
 
-3. Set up the database:
+Update your `.env` file with the database URL:
+```bash
+DATABASE_URL="postgresql://postgres:your_password@localhost:5432/simstudio"
+```
+
+4. Set up the database:
 
 ```bash
-bunx drizzle-kit push
+bunx drizzle-kit migrate 
 ```
 
-4. Start the development servers:
+5. Start the development servers:
 
 **Recommended approach - run both servers together (from project root):**
 
diff --git a/docker-compose.local.yml b/docker-compose.local.yml
index 4882859e6f..3a23fe43d6 100644
--- a/docker-compose.local.yml
+++ b/docker-compose.local.yml
@@ -57,7 +57,7 @@ services:
         limits:
           memory: 8G
     healthcheck:
-      test: ['CMD', 'wget', '--spider', '--quiet', 'http://127.0.0.1:3002']
+      test: ['CMD', 'wget', '--spider', '--quiet', 'http://127.0.0.1:3002/health']
       interval: 90s
       timeout: 5s
       retries: 3
diff --git a/docker-compose.prod.yml b/docker-compose.prod.yml
index c21f3769df..532ed7a648 100644
--- a/docker-compose.prod.yml
+++ b/docker-compose.prod.yml
@@ -55,7 +55,7 @@ services:
       db:
         condition: service_healthy
     healthcheck:
-      test: ['CMD', 'wget', '--spider', '--quiet', 'http://127.0.0.1:3002']
+      test: ['CMD', 'wget', '--spider', '--quiet', 'http://127.0.0.1:3002/health']
       interval: 90s
       timeout: 5s
       retries: 3