Coordinating Production and Delivery Under a (z, Z)-Type Vendor-Managed Inventory Contract

Abstract

This paper models a type of vendor-managed inventory (VMI) agreement that occurs in practice called a (z, Z) contract. We investigate the savings due to better coordination of production and delivery facilitated by such an agreement. The optimal behavior of both the supplier and the retailer are characterized. The optimal replenishment and production policies for a supplier are found to be up-to policies, which are shown to be easily computed by decoupling the periods when the supplier outsources from those when the supplier does not outsource. A simple application of the newsvendor relation is used to define the retailer's optimal policy. Numerical analysis is conducted to compare the performance of a single supplier and a single retailer operating under a (z, Z) VMI contract with the performance of those operating under traditional retailer-managed inventory (RMI) with information sharing. Our results verify some observations made in industry about VMI and show that the (z, Z) type of VMI agreement performs significantly better than RMI in many settings, but can perform worse in others.Vendor-Managed Inventory, Supply Chain, Contract, Markov Decision Process, Multi-Echelon

Evaluating vendor-managed inventory (VMI) in non-traditional environments using simulation

“…A general conclusion offered by that model was that the appropriate balance is not always intuitively clear and that businesses must try to quantitatively model their situation to obtain the optimal decision. Fry et al (2001) developed a mathematical model to evaluate a specific VMI relationship they termed the (z, Z) type of contract where there are minimum and maximum inventory levels where the supplier must pay a penalty for falling outside the boundaries. Their model assumed a periodic inventory review policy.…”

The multi-product price-setting newsvendor with resource capacity constraints

“…Our paper extends the newsvendor modeling framework to develop such a decision support model for any retailer who sells multiple products in a given decision cycle. The newsvendor (or the newsboy) modeling framework is used extensively in modern supply chain planning of retailers and manufacturers (c.f., Wong et al (2009);Fry et al (2001); Cachon and Kök (2007) and references therein). Its origins can be traced to Edgeworth (1888) and numerous extensions of the newsvendor model have been studied in the literature.…”

Optimal pricing and lot sizing vendor managed invento

“…This approach has been widely used in the literature (Cachon and Fisher, 1997;Cachon, 2001;Dong & Xu, 2002). Fry et al (2001) study the effects of logistics in VMI for problems with one buyer and one supplier. Luca Bertazzi et al (2005) compare the VMI policies with more traditional retailermanaged inventory (RMI) policy and show that the VMI policies significantly reduce the average cost compared with RMI policy.…”