This study mainly focuses on formulating a typical vendor-managed inventory (VMI) contract (α, h) motivated by the real case, and examining whether it is capable of achieving channel coordination under stochastic demands. Such a proposed contract (α, h) is fundamentally different from those existing supply contracts since the wholesale price w does not exist, both the supplier and the retailer can only profit from the realized sales. The supplier, as a Stackelberg leader, presents the contractual terms of α and h to the retailer, where α is a profit fraction of the realized sales that the retailer keeps, h is an inventory subsidy paid by the retailer for per unit unsold at the end of a selling season. VMI-arrangements result in authorizing the retailer to decide the targeted sales independently and focus on making sales but delegating many administrative burdens of monitoring inventory and performing fulfillments to the supplier, who bears all the associated inventory and distribution costs. All the information regarding to customer demands, inventory statues and cost parameters is a common knowledge to both the trading partners. In a supply chain with one supplier and one retailer under stochastic demands, the retailer decides the optimal targeted sales to maximize its expected profits under a given contract (α, h); the supplier correctly anticipates how the retailer decides the targeted sales for any α and h, and prefers to set the values of α and h to extract much more channel’s profits. Further, such a proposed contract (α, h) is capable of achieving channel coordination with any desired allocation of the channel’s profits between the supplier and the retailer. The supplier only needs to choose a value of α so as to allocate any amount of channel’s profits required by the retailer, and thus to extract as much profits out of the channel as it can. Numerical experiments show that such a proposed contract (α, h) is capable of achieving substantial gains in supply chain profitability, especially when customer demand is more uncertain. In addition, compared with other existing supply contracts, this contract has many advantages in terms of implementation and administration. In another case with two competing retailers under a multiplicative form of service-dependent and stochastic demands, both the retailers compete in service space under a fixed retail price, and decide the optimal targeted sales and service effort independently under an identical contract (α, h). The competitive equilibrium solution for each retailer and the optimal decisions for the supplier have been characterized in detail. Then, a unique contractual scheme (α*, h*) is derived to lead the system of individually managed members to act as if they were centrally managed, but which fails to achieve any desired allocation of the channel’s profits between the supplier and the retailers since the values of α* and h* solely depend on some given demand and market parameters. Under such a coordinating scheme (α*, h*), the retailers’ profit fraction and expected profits are decreasing as the service competition intensifies, while the supplier can profit more under this situation. The results can help explain some industry phenomena such as why the Stackelberg supplier always wishes the service competition could exist among the retailers and why the Stackelberg supplier could profit more as the service competition intensifies. Finally, several implications for management are explored in detail to implement such a proposed contract (α, h) into practice. Some limitations of this study and directions for future work are discussed. It is believed that such a proposed contract (α, h) can be adopted into a number of real-word situations such as manufacturers and their commission-agents or E-business on the Internet.
- Business logistics
- Inventory control
Supply chain coordination with vendor-managed inventory (VMI) arrangements
WU, X. (Author). 15 Jul 2005
Student thesis: Doctoral Thesis