Stock replenishment policies for a vendor-managed inventory in a retailing system

Using Vendor Managed Inventory (VMI), the vendor determines the replenishment decisions at the location of buyers (retailers). This strategy is used primarily for handling demand fluctuations stemming from the Bullwhip effect, leading the system to prevent from holding excessive inventory that result in a reduction in the overall cost of the supply chain. The main advantages of VMI for vendors are higher levels of accessibility to inventory information and more direct contact with the customers. Similarly, VMI has some pros for the buyers, such as shared risk with upper levels of supply chain and reduction in their holding costs of inventory. In this paper, a vendor-managed inventory system is developed containing one vendor and two buyers in which the main assumption is that back-ordering and lost sales are permitted. In this system, (r, Q) and (R, T) replenishment policies are compared according to their performances to see which one performs more cost-efficiently when partial back-ordering is allowed. In accordance, mathematical models utilizing (r, Q) and (R, T) replenishment policies are developed, and algorithms for deriving the optimal replenishment decision variables are proposed. Moreover, significant differences between the two replenishment policies are discussed. The main finding obtained by this research is that when shortage is permitted, both (r, Q) and (R, T) replenishment policies under VMI have pros and cons in different contexts.