A Single Supplier Multi Buyer Supply Chain Coordination under Vendor- managed Inventory: Ensuring Buyers’ Interests in a Decentralized Setting

Abstract

Our work delves into supply chain coordination involving a single supplier selling a single product to multiple downstream buyers. We consider the case when the supplier proposes implementing vendor-managed inventory (VMI) for each buyer. The VMI contract involves the buyers charging a penalty to the supplier on the excess inventory whenever the supplier exceeds some pre-decided inventory threshold. Unlike the works covered predominantly in the VMI literature involving penalty, where both the penalty and the threshold are exogenous, we develop a model to determine both endogenously. In our study, the supplier deciding on the penalty and the inventory threshold needs to ensure that each of the buyers’ interests is protected, that is, none of the buyers becomes worse off from the optimal position, thereby ensuring the willing participation of all the buyers. We further compared our model with the centralized Joint Economic Lot Size (JELS) model and other existing models. We show that our model has a cost equivalence with the JELS model with unequal order intervals. We also show the superiority of our proposed model over the existing VMI models in terms of the overall costs. Finally, we examine the impact of size and ordering cost on each buyers’ costs through numerical analysis.