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Optimal (z, Z)-type contracts for vendor-managed inventory

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  • Lee, Jun-Yeon
  • Cho, Richard K.

Abstract

We examine (z, Z)-type contracts for vendor-managed inventory (VMI) between a supplier and a retailer from the retailer's perspective. A (z, Z) VMI contract specifies minimum and maximum inventory levels and their corresponding under- and over-stocking penalties. The retailer chooses the contract parameter values and the supplier decides whether to accept the contract and, if accepts, manages the inventory at the retailer and makes replenishment decisions. The supplier accepts the contract if his cost under VMI is no larger than his reservation cost. We provide the optimal (z, Z) VMI contract for the retailer and the corresponding optimal replenishment decisions for the supplier and show that the optimal (z, Z) VMI contract can coordinate the supply chain under mild conditions. We also examine a VMI contract with stockout penalty and holding-cost sharing, which is a special type of (z, Z) contract, and find that it may perform well compared with the optimal (z, Z) VMI contract, although its performance may depend on several factors such as the supplier's reservation cost.

Suggested Citation

  • Lee, Jun-Yeon & Cho, Richard K., 2018. "Optimal (z, Z)-type contracts for vendor-managed inventory," International Journal of Production Economics, Elsevier, vol. 202(C), pages 32-44.
    • Handle: RePEc:eee:proeco:v:202:y:2018:i:c:p:32-44
    DOI: 10.1016/j.ijpe.2018.05.011
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    References listed on IDEAS

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    1. Verma, Nishant Kumar & Chakraborty, Abhishek & Chatterjee, Ashis K., 2014. "Joint replenishment of multi retailer with variable replenishment cycle under VMI," European Journal of Operational Research, Elsevier, vol. 233(3), pages 787-789.
    2. Lee, Jun-Yeon & Cho, Richard K. & Paik, Seung-Kuk, 2016. "Supply chain coordination in vendor-managed inventory systems with stockout-cost sharing under limited storage capacity," European Journal of Operational Research, Elsevier, vol. 248(1), pages 95-106.
    3. Cai, Jianhu & Hu, Xiaoqing & Tadikamalla, Pandu R. & Shang, Jennifer, 2017. "Flexible contract design for VMI supply chain with service-sensitive demand: Revenue-sharing and supplier subsidy," European Journal of Operational Research, Elsevier, vol. 261(1), pages 143-153.
    4. Cai, Jianhu & Zhong, Man & Shang, Jennifer & Huang, Weilai, 2017. "Coordinating VMI supply chain under yield uncertainty: Option contract, subsidy contract, and replenishment tactic," International Journal of Production Economics, Elsevier, vol. 185(C), pages 196-210.
    5. Darwish, M.A. & Odah, O.M., 2010. "Vendor managed inventory model for single-vendor multi-retailer supply chains," European Journal of Operational Research, Elsevier, vol. 204(3), pages 473-484, August.
    6. Lee, Jun-Yeon & Cho, Richard K., 2014. "Contracting for vendor-managed inventory with consignment stock and stockout-cost sharing," International Journal of Production Economics, Elsevier, vol. 151(C), pages 158-173.
    7. Shah, Janat & Goh, Mark, 2006. "Setting operating policies for supply hubs," International Journal of Production Economics, Elsevier, vol. 100(2), pages 239-252, April.
    8. Hariga, Moncer & Gumus, Mehmet & Daghfous, Abdelkader, 2014. "Storage constrained vendor managed inventory models with unequal shipment frequencies," Omega, Elsevier, vol. 48(C), pages 94-106.
    9. Lee, Jun-Yeon & Ren, Louie, 2011. "Vendor-managed inventory in a global environment with exchange rate uncertainty," International Journal of Production Economics, Elsevier, vol. 130(2), pages 169-174, April.
    10. Michael J. Fry & Roman Kapuscinski & Tava Lennon Olsen, 2001. "Coordinating Production and Delivery Under a (z, Z)-Type Vendor-Managed Inventory Contract," Manufacturing & Service Operations Management, INFORMS, vol. 3(2), pages 151-173, August.
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