A supply chain model of vendor managed inventory

AsupplychainmodelofvendormanagedinventoryYanDonga,1,KefengXub,*aDepartmentofMarketingandLogisticsManagement,TheCarlsonSchoolofManagement,UniversityofMinnesota,Minneapolis,MN55455,USAbDivisionofManagementandMarketing,CollegeofBusiness,UniversityofTexas,SanAntonio,TX78249,USAReceived8January2001;accepted28March2001AbstractThisresearchevaluateshowvendormanagedinventory(VMI)affectsasupplychannel.Specifically,VMIalwaysleadstoahigherbuyer’sprofit,butsupplier’sprofitvaries.Intheshort-term,VMIisfoundtoreducetotalcostsofthechannelsystem,butundercertaincostconditionsbetweenbuyerandsupplier,itcoulddecreasethepurchasingpriceandsupplier’sprofit.Inthelong-run,itcouldmorelikelyincreasesupplier’sprofitthanintheshort-run.Finally,VMIisaneffectivesupplychainstrategythatcanrealizemanyofthebenefitsobtainableonlyinafullyintegratedsupplychain.
2002ElsevierScienceLtd.Allrightsreserved.Keywords:Supplychainmanagement;Distribution/logistics;Inventorymanagement;Materialsmanagement;Vendormanagedinventory;Consignment1.IntroductionVendormanagedinventory(VMI),alsoknownasconsignmentinventoryonotheroccasions,hasbeenwidelyusedinvariousindustries.Forinstance,onesurveyfoundthatinhospitalma-terialsmanagement,VMIachievedhigherpenetrationthanjust-in-timeandstocklessmethods(Gerber,1991).AnothersurveyofthemassretailindustryindicatedthatVMIprogramswouldmultiplyinthenextfewyears(Andel,1996).MajorretailerssuchasWal-Mart,Kmart,DillardDepartmentStores,andJCPenneyareamongtheearlieradoptersofVMI.TelecommunicationsgiantssuchasLucentTechnologiesareintheprocessofconvertingmuchoftheirmaterialsTransportationResearchPartE38(2002)75–95*Correspondingauthor.Tel.:[phone];fax:[phone].E-mailaddresses:[e-mail](Y.Dong),[e-mail](K.Xu).1Tel.:[phone]-5545/02/$-seefrontmatter
2002ElsevierScienceLtd.Allrightsreserved.PII:S1366-5545(01)00014-XmanagementsystemstoVMI.ThisrecentpopularityofVMIhasledtotheclaimthatvendormanagedinventoryisthewaveofthefutureandtheconceptwillrevolutionizethedistributionchannel(Burke,1996;Cottrill,1997).WhethersuchatrendwillpersistdependsontheeconomicbenefitsbroughttothemembersalongasupplychainbyaVMIprogram.Thereis,however,lackofin-deptheconomicanalysisofsuchaprogram,especiallyintermsofitsimpactsonthepartiesinvolved.Forinstance,whileconsignmentinthehealthcareindustryhasbecomemoreandmorepopularinrecentyears,confusionexistsastowhenandwhyconsignmentiseffective.ThereisevidencethatVMIisbeneficialtobothabuyingcompanyandasupplyingcompany,thoughthesuppliermaytakealongerperiodofadjustmentandreconfigurationbeforethebenefitsofVMIcanberealized.NorthwesternSteelandWireasasupplier,reportedbyNolan(1998),wasabletogeneratemorevolumeafterVMIbecauseinventoryturnswereup.North-western’scustomersplacedmoreorderswithNorthwesternafterseeingrealbenefitsandefficiencygainswiththeVMIprograms.Ontheotherhand,somepartiesinvolvedinaVMIrelationship,suppliersinparticular,arelesscertainaboutthesepotentialbenefitsandtendtoacceptVMIasanecessityduetointenseglobalcompetition.Forinstance,AirProductsandChemicals(AP&C)isfacedwiththedilemmathatitscustomerswantzeroinventory,therebytyingupmoreofAP&C’sworkingcapital.Thecompanydoesnotbelievethiswouldimprovebusinessprocessbutratherwouldincreasethetotaladministrationandprocessingcosts(Gamble,1994).AVMI-consignmentisessentiallyanarrangementwherebytheownersofgoods,the‘‘con-signor’’,deliversitsgoodstoanotherparty,the‘‘consignee’’,foruseorforsalebytheconsignee,withtheproceedsofthesalebeingremittedtotheconsignoronlyaftertheactualuse/sale(Fagel,1996).AtypicalVMIprograminvolvesasupplierwhichmonitorsinventorylevelsatitscus-tomer’swarehousesandassumesresponsibilityforreplenishingthatinventorytoachievespecifiedtargetsthroughtheuseofhighlyautomatedelectronicmessagingsystems(Copacino,1993).Thesupplierthusmakesthereplenishmentdecision,ratherthanwaitingforthecustomertoreordertheproduct.Anecdotalevidencesuggeststhataconsigneemayenjoyreductionsinholdingcostsandsomeoperationalcostspluscashflowbenefits(e.g.,Benefield,1987),whileaconsignorneedstobeartheburden(ofinventorycarryinganddemandforecasting)butprobablygainchancestoimproveotherproductionandmarketingefficiency(Cottrill,1997).ThusasystematicevaluationoftheprofitimplicationsofaVMIprogramonbothtradingpartnerswillcertainlyfacilitatefuturesupplychaincoordination.OneaspectofVMI,informationsharing,hasrecentlybeenaddressed.ItisbelievedthatsincethepartiesinvolvedsharesalesinformationunderVMI,lessinformationdistortionshouldbeexpected(Leeetal.,1997;Chenetal.,2000).Asaconsequence,inventoryandotherproductioncostswilllikelybereducedwhilecapacityutilizationwillbeincreased,asdemonstratedbyXuetal.(2001)andWalleretal.(1999).Thereisalsoalargesetofliteraturewrittenaroundthethemeofchannelcoordination.ThomasandGriffin(1996)provideacomprehensivereviewofthetopic.Afewnotablestudiesrelatedtobuyer–vendorcoordinationincludeLeeandRosenblatt(1986),Banerjee(1986),AnupindiandAkella(1993),KohliandPark(1994),andWeng(1995)whichanalyzetheseparateorjointoptimalorderingpoliciesand/ortheoptimal