An integrated vendor-managed inventory model for a two-echelon system with order cost reduction

Abstract

Simultaneously reducing inventory levels of raw materials, work-in-process, and finished items has become a major focus for supply chain management. In order to achieve a higher degree of coordination and automation among the supply chain parties, the supply chain sometimes invests in reducing the ordering cost to streamline and speed up transactions via the application of information technology. In this paper, an integrated vendor-managed inventory (VMI) model is presented for a single vendor and multiple buyers, where the vendor purchases, and processes raw materials and then delivers finished items to multiple buyers. A joint relevant cost model is developed with constant production and demand rates under the assumption that the buyers’ ordering cycles may be different and that each buyer can replenish more than once in one production cycle, in which the investment decision is also considered. A solution procedure of the optimal investment amount and replenishment decision for all the buyers and the vendor is proposed. Three numerical examples with an exponential ordering cost function are presented to provide insight.