Evaluating vendor managed inventory systems: how incentives can benefit supply chain partners

Abstract

In a vendor managed inventory (VMI) system, the effects of financial incentives on the entire supply chain (SC) and on the individual firms are investigated in this study. To this end, order management, order replenishment and inventory control activities of a two-echelon SC are examined via modeling using discrete event simulation. By determining the appropriate parameters for the incentives with scenario analysis, balanced profit distribution between buyers and a supplier in VMI is established. Simulation outputs of the traditional model, VMI only and VMI with incentives models are compared based on profits with paired comparisons. In VMI with incentives, both buyers, and the supplier experience higher benefits than the traditional system. This study provides a new method which eliminates the unbalanced benefit distribution due to VMI and offers almost equal benefits to the participating firms. With financial incentives, firms are encouraged to share information with each other to work in a coordinated SC.

Keywords:

• vendor managed inventory
• supply chain contracts
• distribution network
• simulation
• modeling
• inventory management
• incentive systems
• performance

JEL Classification:

• M11
• C15

Additional information

Notes on contributors

Sule Birim

Sule BİRİM is a Research Assistant in Manisa Celal Bayar University, Department of Business Administration. She completed her PhD at Manisa Celal Bayar University in Business Administration in 2014. Her research interests are simulation in supply chains, vehicle routing problem, forecasting, metaheuristic algorithms and quantitative decisions making. She has various publications in international peer reviewed journals.

Cigdem Sofyalioglu

Cigdem SOFYALIOGLU is an Associate Professor at Manisa Celal Bayar University, Department of Business Administration. She completed her PhD at Manisa Celal Bayar University in Business Administration. Her research interests include risk management in supply chains, multi-criteria decision analysis, total quality management and quality management techniques. She has numerous publications in national and international peer-reviewed journals consisting articles, proceedings and book chapters.