The benefit of VMI strategies in a stochastic multi-product serial two echelon system

Abstract

We consider a multi-product serial two echelon inventory system with stochastic demand. Inventories at the downstream location are replenished periodically using an automatic ordering system. Under vendor managed inventory strategies the upstream stage is allowed to adapt these orders in order to benefit from economies of scale. We propose three different VMI strategies, aiming to reduce the order picking cost at the upstream location and the transportation costs resulting in reduced total supply chain costs. In a detailed numerical study the VMI strategies are compared with a retailer managed inventory strategy for two different demand models suitable for slow moving products. It is shown that if inventory holding costs are low, compared to handling and transportation costs, efficiencies at the warehouse are improved and total supply chain costs are reduced.