The optimal replenishment policy for time-varying stochastic demand under vendor managed inventory

Abstract

Abstract A Vendor Managed Inventory (VMI) partnership places the responsibility on the vendor (rather than on buyers) to schedule purchase orders for inventory replenishment in the supply chain system. In this research, the supply chain network considers the Silver–Meal heuristic with an augmentation quantity replenishment policy between both traditional and VMI systems. We consider time-varying stochastic demand in two-echelon (one vendor, multiple retailers) supply chains. This paper seeks to find the supply chain that minimizes system cost through comparing performance between traditional and VMI systems. A mathematical model is developed, and total supply chain cost is used as the measure of comparison. The models are applied in both traditional and VMI supply chains based on pharmaceutical industry data, and we focus on total cost difference compared through the use of Adjusted Silver–Meal (ASM) and Least Unit Cost heuristics. Finally, a numerical example and a sensitivity analysis are also illustrated to show the applicability of the model.