Introducing the Time Value of Money in a Non-consignment Vendor Managed Inventory Model

Abstract

Vendor managed inventory (VMI) is an integrated approach for buyer–vendor coordination, according to which the vendor (supplier or manufacturer) decides on the appropriate buyer’s (retailer’s) inventory levels. The time value of money has not traditionally been considered in evaluating VMI supply chain’s total inventory cost in any studies up to now. Therefore, in the present study a new model for two-echelon single-manufacturer multi-retailer supply chain under non-consignment VMI program by considering time value of money is proposed. In order to take the time value of money into consideration, the present value of each inventory cost is evaluated in a single period and generalized to infinity horizon and then is transformed to the equivalent annual cost. This model also explicitly includes contractual agreements between the manufacturer and each retailer. Under this type of contracts, an upper bound on each retailer’s inventory level is placed such that the manufacturer is penalized for items exceeding this bound. At the end, a sensitivity analysis is conducted to study effects of key parameters on the optimal solution and validate the proposed model.