Comparative study on decentralised inventory policy and Vendor Managed Inventory with (r, Q) replenishment strategy

Abstract

Recently, Vendor Managed Inventory (VMI) has emerged as a significant development towards collaboration in supply chain management. This paper develops a model to compare the performance of VMI with the performance of decentralised inventory policy. A two-member (vendor and buyer) system implementing (r, Q) replenishment strategy with multi-period, uncertain and price-sensitive customer demand is considered. We find that under a certain cost condition, although VMI likely reduces the vendor's profit, it, compared with decentralised inventory policy, will decrease the retail price and consequently brings higher expected profit level for the buyer and the whole supply chain. However, if the cost condition is not satisfied, VMI will result in a higher retail price, possibly lead a lower expected profit for vendor and not necessarily lead to a higher expected profit for the buyer or the whole supply chain.