Asymmetric Information in Vendor Managed Inventory Systems

Abstract

This study investigates the conditions under which Vendor Managed Inventory (VMI) systems lead to improved quantity decisions and increased supply chain profits. The study provides analytical models of both a traditional and a VMI system, incorporating both the asymmetric information that is present in such relationships and the quantity choices of both parties. Using survey data, it tests empirical predictions about the characteristics of divisions that use VMI and the products for which they utilize VMI. The results indicate that VMI systems are not unambiguously better than traditional systems. A manufacturer will select VMI when the information that is transmitted between the retailer and manufacturer is reliable and precise and demand is variable. The survey data corroborates the finding that manufacturers use VMI when the information linkages between the parties are sophisticated and retailer demand is variable.