An integrated inventory model for a single vendor and multiple buyers with ordering cost reduction

Abstract

Forming strategic alliances and utilizing modern information technologies have been the two most important ways for firms to gain such competitive advantages as lower logistics costs and secure customers’ loyalty. In this paper, we consider an integrated inventory system where a single vendor purchases and processes raw materials in order to deliver finished items to multiple buyers. The vendor and all buyers are willing to invest in reducing the ordering cost (e.g., establishing an electronic data interchange based inventory control system) in order to decrease their joint total cost. The amount of investment determines the planned ordering cost and hence affects their replenishment decisions. One major managerial implication from this ordering cost reduction is that the efforts to streamline and speedup transactions via the application of information technologies may result in a higher degree of coordination and automation among allied trading parties. An analytical model is developed to derive the optimal investment amount and replenishment decisions for both vendor and buyers. The exponential ordering cost function is then applied to our general model, and a numerical analysis is performed to provide interesting insights of the model. Numerical results show that the vendor and all the buyers can benefit directly from substantial cost savings by this ordering cost reduction investment.