Vendor-managed inventory in practice: understanding and mitigating the impact of supplier heterogeneity

Abstract

Vendor managed inventory (VMI) agreements are a supply chain collaboration principle in which the supplier is responsible for keeping the inventory at the buyer between given lower and upper inventory limits. VMI gives the supplier a lot of autonomy while making replenishments, allowing the supplier to efficiently ensure availability at the buyer. But different suppliers may apply different approaches for staying between the limits under VMI. Relatedly, the objectives of a supplier are not completely aligned with those of the buyer. We develop a methodology for setting appropriate lower and upper inventory limits, taking into account the heterogeneity in the supplier base. To this end, by distinguishing between various possible strategic supplier objectives and various approaches for staying within the inventory limits, we arrive at four possible supplier types. We develop a methodology for classifying suppliers into one of these four types based on historic inventory trajectories and argue how to set inventory limits tailored to each supplier type. A case study of the approach at a large high-tech manufacturer reveals that the approach accurately identifies the type of each of the 47 VMI suppliers of the manufacturer. Moreover, a simulation with company data shows that tailoring inventory limits to the suppliers' types may lead to a cost reduction of 4–6 (Formula presented.) without reducing the service level, as compared to a benchmark method that does not take into account supplier types.