Analysis of Sub-Optimization Impact on Partner Selection in VMI

Abstract

Different combinations of elements will lead to different system functions, so a supply chain composed of enterprises with different characteristics will lead to differences in the system performance. In this study, a vendor-managed inventory (VMI) model is built; the model takes into consideration the factors of demand amplification, order and inventory cost change. Then, the change in the revenue of the supply chain and its members—due to VMI—are represented, and the influence of the different production parameters on this change is analyzed. On the basis of proving the distinctive feature of the Kaldor–Hicks improvement possessed by VMI, the profit fluctuations of enterprises in a supply chain that is composed of members with different characteristics using VMI are calculated by a numerical experiment. The conclusions of this paper indicate why enterprises prefer to choose VMI partners, and the results confirm the sub-optimal characteristic of this tendency. In addition, the results also reveal the inherent contradiction of VMI between supply chain efficiency improvement and coordination among the supply chain’s members. If an enterprise chooses VMI partners solely to maximize its own interests, the possibility of Pareto improvement in the supply chain will be maximized. However, at this time, a more effective supply chain system cannot be organized.