The application of vendor managed inventory in the supply chain inventory model with probabilistic demand

Numerous studies show that the application of Vendor Managed Inventory (VMI) provides benefits for members of the supply chain. This research considers the application of VMI in a supplier-buyer relationship and develops an analytical model to prove the benefits obtained from the VMI collaborative initiatives. A mathematical model is developed for a two-level supply chain consists of single supplier and single buyer in a probabilistic demand situation. The analytical model shows that the VMI implementation in the probabilistic inventory model, considering leadtime as a decision variable, has the ability to reduce the supply chain expected total cost, reduce the leadtime, therefore increase the frequency of replenishment and improve the service level. Numerical examples are given to prove these results analytically.