Vendor-managed inventory and the effect of channel power

We analyze decentralized supply chains that follow general continuous review (Q, R) inventory policies subject to vendor–managed inventory agreements where the supplier chooses the order quantity Q, and the retailer chooses the reorder point R. Within the VMI scenario, we explore the effect of divisions of channel power on supply chain and individual agent performance by examining different game theoretic models. Optimal policies and analytical results, including existence and uniqueness proofs for equilibrium solutions under VMI, are derived. Numerical results are provided to compare the effectiveness of VMI and to analyze different channel power relationships under a variety of environmental conditions. We find that VMI can result in considerable supply chain savings over traditional relationships and that the relative division of channel power can significantly affect the performance of VMI. Interestingly, we find that the greatest system benefits from VMI arise in asymmetric channel power relationships, but that individual agents lack the incentive to assume a leadership role.