A model for evaluating supplier-owned inventory strategy

Supplier-owned inventory (SOI) is an arrangement where the vendor is responsible for maintaining and controlling the inventory at the buyer's premises. The buyer draws the required quantity of the item from this SOI as and when required as if it were its own component store. In return, the vendor is provided with the latest demand information to control its inventory costs. In this paper, we develop a model to analyze and evaluate the SOI strategy. We conduct a numerical study to understand how the various model parameters affect the total costs under the SOI arrangement. The numerical study reveals that the total supply chain costs will never be higher under the SOI arrangement. In general, the benefits of the SOI arrangement to the supply chain are higher when the buyer that adopts SOI accounts for a larger percentage of the supplier's total demand. (C) 2002 Elsevier Science B.V. All rights reserved.