A vendor-managed inventory scheme as a supply chain coordination mechanism

In this paper, we have considered a vendor-managed inventory (VMI) arrangement in a supply chain (SC), where the buyer imposes a penalty for shipments exceeding an upper limit. We have shown as how the industry practice of VMI under penalty can be used as a SC coordination mechanism. The vendor can influence the buyer to increase the batch size without making the buyer worse off. We also discuss how such a penalty scheme may be derived. Further, we have established the equivalence of VMI under deterministic demand with that of quantity discount models, thus highlighting the need to incorporate both cooperation and coordination perspectives while analysing SC collaboration mechanisms.