Pricing in a vendor managed inventory system

The turnover and profit of an organisation depend on the price and demand of its products. It is generally believed that a fair price acceptable to the partners is an important factor for better relations in VMI. Revenue-sharing is the concept by which total channel profit should be allocated among Supply Chain (SC) partners in different profit ratios. The paper, therefore, proposes a methodology to determine the common/optimal price (contract and selling prices) that protects the profit of the buyer which is the main reason for the existence of partnership, for maximum channel profit in a two-echelon SC to implement VMI. This paper analyses the effect of variations in revenue share, demand function, holding cost and setup cost on parameters such as contract and selling prices with standard data-set. The analysis indicates that the proposed approach is robust, efficient, practically viable and acceptable to SC partners.