Vendor Managed Inventory Contracts: Coordinating the Supply Chain While Looking From the Vendor's Perspective

European Journal of Operational Research, Forthcoming

30 Pages Posted: 24 Jun 2018

See all articles by Arvind Sainathan

Arvind Sainathan

Nanyang Technological University (NTU) - Nanyang Business School

Harry Groenevelt

Simon Graduate School of Business, University of Rochester

Date Written: June 11, 2018

Abstract

The paper studies coordination of a supply chain when the inventory is managed by the vendor (VMI). We also provide a general mathematical framework that can be used to analyze contracts under both retailer managed inventory (RMI) and VMI. Using a simple news-vendor scenario with a single vendor and single retailer, we study five popular coordinating supply chain contracts: buyback, quantity flexibility, quantity discount, sales rebate, and revenue sharing contracts. We analyze the ability of these contracts to coordinate the supply chain under VMI when the vendor freely decides the quantity. We find that even though all of them coordinate under RMI, quantity flexibility and sales rebate contracts do not generally coordinate under VMI. Furthermore, buyback and revenue sharing contracts are equivalent. Hence, we propose two new contracts which coordinate under VMI (one of which coordinates under RMI too, provided a well-known assumption holds). Finally, we extend our analysis to consider multiple independent retailers with the vendor incurring linear or convex production cost, and show that our results are qualitatively unchanged.

Keywords: Supply Chain Management, News-Vendor, Retailing, Buyback Contract

JEL Classification: M11

Suggested Citation

Sainathan, Arvind and Groenevelt, Harry, Vendor Managed Inventory Contracts: Coordinating the Supply Chain While Looking From the Vendor's Perspective (June 11, 2018). European Journal of Operational Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3193826

Arvind Sainathan (Contact Author)

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore, 639798
Singapore

Harry Groenevelt

Simon Graduate School of Business, University of Rochester ( email )

Carol Simon Hall 3-339
Rochester, NY 14627
United States
585-275-2825 (Phone)
585-275-9331 (Fax)

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