The Value of Centralization in a Vendor-Managed Inventory System

In this paper, we investigate the effect of information precision and information reliability on manufacturer-retailer relationship by analyzing and comparing two inventory management systems, a traditional system and a Vendor Managed Inventory (VMI) system. We first construct a basic model and a benchmark model for both systems. Then, we analyze and compare these models. Different from the previous literature, we propose a new measure for the extent to which the manufacturer is willing to use the VMI system. Our analysis show that more precise information at the retailer´s alone may hurt the performance of the traditional system, while VMI system without information sharing still dominates the traditional system. This suggests that the benefit of centralization in a VMI system is significant enough to improve the supply-chain performance regardless of information precision and reliability. With the new measure, we show that the manufacturer´s willingness to implement a VMI program increases monotonically in demand variability.