Optimizing an integrated vendor-managed inventory system for a single-vendor two-buyer supply chain with determining weighting factor for vendor׳s ordering cost

Abstract

This paper considers a two-echelon supply chain model with a single vendor and two buyers in which the vendor supplies the same item to both buyers at a finite production rate. The purpose of this study is twofold. First, mathematical models are developed for the integrated vendor-managed inventory (VMI) policy as well as the traditional retailer-managed inventory (RMI) system and solution algorithms are presented to determine the optimal lot size and total inventory cost of the supply chain. Then, the effect of key parameters including buyer׳s demand, buyer׳s transportation cost, vendor׳s ordering cost, and vendor׳s holding cost on lot size variation is studied in each policy. A weighting factor is also determined for the vendor׳s ordering cost which is used to compare the two policies. Detailed numerical experiments are provided to illustrate efficacy of the proposed approach. Results indicate that greater reduction in total cost of supply chain can be achieved by using VMI and provide a comprehensive insight into selection of inventory policies to improve commercial business and supply chain performance.