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Vendor-managed inventory and the effect of channel power

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Abstract

We analyze decentralized supply chains that follow general continuous review (Q, R) inventory policies subject to vendor-managed inventory agreements where the supplier chooses the order quantity Q, and the retailer chooses the reorder point R. Within the VMI scenario, we explore the effect of divisions of channel power on supply chain and individual agent performance by examining different game theoretic models. Optimal policies and analytical results, including existence and uniqueness proofs for equilibrium solutions under VMI, are derived. Numerical results are provided to compare the effectiveness of VMI and to analyze different channel power relationships under a variety of environmental conditions. We find that VMI can result in considerable supply chain savings over traditional relationships and that the relative division of channel power can significantly effect the performance of VMI. Interestingly, we find that the greatest system benefits from VMI arise in asymmetric channel power relationships, but that individual agents lack the incentive to assume a leadership role.

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Authors and Affiliations

  1. Department of Statistics, Operations and Management Science, College of Business Administration, The University of Tennessee, Knoxville, TN, 37996, USA

    Bogdan C. Bichescu

  2. Department of Quantitative Analysis and Operations Management, College of Business, University of Cincinnati, Cincinnati, OH, 45221-0130, USA

    Michael J. Fry

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  1. Bogdan C. Bichescu
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  2. Michael J. Fry
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Correspondence to Bogdan C. Bichescu.

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Bichescu, B.C., Fry, M.J. Vendor-managed inventory and the effect of channel power. OR Spectrum 31, 195–228 (2009). https://doi.org/10.1007/s00291-007-0102-7

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