A note concerning physical space occupation costs in vendor managed inventory with consignment agreement models

Abstract

A new analytic formulation of the vendor managed inventory with consignment agreement is proposed. It represents a modified and more realistic version of the model proposed in Braglia and Zavanella (2003). The evaluation of the stockholding related costs is herewith substantially revisited to consider the requirements of a standard VMI relationship with consignment agreement. In particular, the physical space occupation cost held by the buyer is introduced as a component of the overall holding cost and is referred to the maximum stock level, rather than to the average value, as proposed in the past literature. Finally, an implicit analytical solution is given and compared to the original one obtained by Braglia and Zavanella (2003).