Exploring the effect of vendor managed inventory on the supply chain partner using simulation

Abstract

To manage supply chain efficiently and effectively, the members of the supply chain should collaborate and cooperate. It is known that information sharing and visibility are important factors that contribute to supply chain coordination. The visibility in real customer demand can help reduce the bullwhip effect, improve customer service, and reduce costs. Vendor managed inventory (VMI) is an approach that allows suppliers/vendors to access to their customer's inventory and demand information. The benefits of VMI have been reported in many studies. However, the gain that each member of the supply chain realized could be different. Some studies show that upstream members benefit more than the downstream ones, while some studies show the opposite results. Therefore, some members of the supply chain are still reluctant to adopt the VMI practice since they are not sure whether the benefits gain will justify the costs incurred. In this paper, simulation model is used to explore the effect of VMI implementation on supply chain costs both on system-wide level and on member level. It was found that VMI helps reduce total supply chain costs. However, the level of cost reduction differs significantly among members depending on the types of the implementation. As a result, it is important to establish the level of investment required and benefit shared for each member before implementing VMI. The members that may experience less cost reduction should be offered higher benefit share (or required less investment). Otherwise, the whole supply chain may lose the opportunity to gain additional benefits from implementing VMI. In addition, the benefits gained from VMI also vary depending on supply chain environment. Simulation model can be used as a guiding tool for establishing appropriate investment and benefits sharing structure for VMI implementation in different supply chain conditions.