The Relative Value of Information Sharing with a Central Decision Maker in Vendor Managed Inventory

Abstract

We study the relationship between information sharing and decision transfer as the two major approaches for improving the efficiency of supply chains. Decision transfer implies that the inventory decisions are made centrally and there is no incentive misalignment. Vendor Managed Inventory (VMI), as a successful initiative in supply chain management, applies both approaches. However, the relative importance of these two approaches and their interactions are not well understood, which is the focus of our paper. We define the relative value of information sharing as the ratio of its benefit alone to the benefit of applying both information sharing and central decision making. First, we study stylized two-stage supply chains in the literature in which the optimal policy for inventory management is known. Then, we move to cases with more real settings about the demand that have been designed to reflect the industry observations. Our results with positive setup costs show that when the retailer's knowledge about demand is accurate, information sharing on average comprises 95% of the VMI profit.

Keywords: Incentive alignment, Inventory management, Setup costs, Decision transfer, Central decision making