When Does A Supply Chain Member Benefit from Vendor-Managed Inventory?

Enabled by the advances in information technology (IT), many supply chain partners have adopted the practice of vendor-managed inventory (VMI) to improve operations efficiency. While the IT investment for VMI implementation can be significant, the benefits of VMI to different supply chain members are not obvious based on anecdotal evidences and empirical studies. This paper studies the effects of VMI on a supply chain consisting of one manufacturer and one retailer to shed light on when an IT investment for VMI adoption can be justified. We show that whether the two supply chain members benefit from VMI depends on how the holding or shortage cost increment from the manufacturer to retailer compares with two corresponding critical values. We then develop comparative statics results on how these critical values change with respect to different parameters. Interestingly, the retailer is more likely to benefit from the adoption of VMI when its inventory holding cost is low, and the manufacturer is more likely to benefit from VMI adoption when its inventory holding cost is high, contradicting what our intuitions would suggest and what has been prescribed in the literature.