An inventory positioning model under vendor managed inventory system

Abstract

Inventory management is one of the key functions in any supply chain. Since inventory cost occupies a significant portion of supply chain cost, it is essential to employ a good inventory policy in order to reduce the supply chain cost while improving the service level. This paper presents a vendor managed inventory (VMI) policy with emergency orders for a supply chain with a single vendor and two independent retailers. A mathematical model is developed using the concept of demand rate, assuming Poisson demand for the retailers. The formulated model is used to help determine the optimal system base stock level, delivery quantities to retailers and the cycle length such that the total expected inventory cost of the system is minimised. Numerical experiments and sensitivity analysis are then conducted to examine the effect of model parameters on total inventory cost and optimal solution.