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Exploring the benefits of vendor managed inventory
Kazim Sari
Department of International Logistics and Transportation, Beykent University, Istanbul, Turkey
Abstract
Purpose – The purpose of this paper is to explore the performance increase achieved by vendor managed inventory (VMI) under different levels of outside supply capacity, demand uncertainty, and lead time. Design/methodology/approach – The study uses discrete event simulation to explore the performance increase achieved by VMI under different supply chain scenarios. Findings – The analysis suggests that when implementing a VMI program, the capacity restrictions of suppliers have to be taken into consideration even though they have not participated in the program. Furthermore, the results also show that unless the retailer provides additional information to the distributor to resolve the uncertainty, higher levels of uncertainty in market demand create significant reductions in the savings realized by VMI. Finally, this study proves that, regardless of lead time horizons, VMI provides nearly the same level of performance increase as long as the ratio of the retailer’s lead time to that of the supplier’s remains constant. Practical implications – This analysis provides a means for practitioners to understand the impact of various environmental and operational factors on the performance increase achieved by VMI so they can better analyze their specific business conditions to prepare their organizations for more successful VMI programs. Originality/value – Although there is a range of research focusing on VMI, only a few of those have tried to identify the factors that play an important role in the failure of VMI programs. While extending the current literature, this is the first study to explore the impact of outside supply capacity on the performance improvements achieved by VMI. Keywords Supply chain management, Vendor relations, Inventory management, Information strategy, Simulation Paper type Research paper

Exploring the benefits of VMI

529
Received March 2007 Revised May 2007 Accepted May 2007

1. Introduction Supply chain management (SCM) is:
. . . the efficient management of the end-to-end process, which starts with the design of the product or service and ends with the time when it has been sold, consumed, and finally, discarded by the consumer (Swaminathan and Tayur, 2003, p. 1387).

By coordinating different enterprises along the logistics network or establishing business partnerships, SCM is concerned with finding the best strategy for the whole supply chain (Simchi-Levi et al., 2003, p. 2). One important issue of finding the best strategy for the whole supply chain is sharing product and production information amongst supply chain members. It has been recognized that information sharing at the retailer level produces significant benefits for the supply chain by reducing the bullwhip effect (Lee et al., 1997a; Chen et al., 2000a, b; McCullen and Towill, 2002; Dejonckheere et al., 2004; Ouyang, 2006; Li et al., 2006) and supply chain costs

International Journal of Physical Distribution & Logistics Management Vol. 37 No. 7, 2007 pp. 529-545 q Emerald Group Publishing Limited 0960-0035 DOI 10.1108/09600030710776464

Yu et al. is one of the most widely discussed partnering initiatives for encouraging collaboration and information sharing among trading partners (Angulo et al. Zhao et al. Mishra and Raghunathan.. also known as continuous replenishment or supplier-managed inventory. The retailer provides the vendor with access to its real-time inventory level.. a grocery chain. Electrolux Italia (De Toni and Zamolo. 2000. 2004). 2004. 2003. 2005). such as Glaxosmithkline (Danese. The capabilities of this supplier. p.. the retailer may set certain service-level and/or shelf-space requirements. 161). b) and better utilization of manufacturing capacity (Waller et al. In this partnership program.. it results in reduced bullwhip effect (Lee et al. For instance.. Indeed. which are then taken into consideration by the vendor. ¸ While many benefits have been identified in the literature. retailers. Angulo et al. there are also a number of challenges that may exist in practice and that can potentially reduce the benefits obtained from VMI or lead to failures in VMI programs..... a few research studies have been carried out to investigate the underlying reasons of these failures (Aviv. 1999.. do not desire to engage in information sharing. Cetinkaya and Lee. Boeing and Alcoa (Micheau. 1999). in a VMI system. 2004). Our research differs from those that have been carried out in previous studies in one major aspect. Similarly. 2000)... 1999. which is not participated into VMI. Disney and Towill. p.. as well as better synchronization of replenishment planning (Waller et al. However. 2003. not the retailers (Lee et al. Indeed. 2005). the retailer’s role shifts from managing inventory to simply renting retailing space (Simchi-Levi et al. 2000). shut down its VMI effort about one year after due in part to VMI vendors’ inability to deal with product promotions (Simchi-Levi et al. Popularized in the late 1980s by Wal-Mart and Procter & Gamble (Waller et al. VMI offers a competitive advantage for retailers because it results in higher product availability and service level as well as lower inventory monitoring and ordering cost (Waller et al. etc. That is. Spartan Stores. 1999). Most of these research studies are limited to identifying the factors that play an important role in these failures. 154. most of the time. Kmart cut a substantial amount of VMI contracts because they were not satisfied with the forecasting ability of VMI vendors (Fiddis. 2001. 2005). consider an outside supplier serving raw materials for VMI partners. 2002.IJPDLM 37. It is a supply chain initiative where the vendor decides on the appropriate inventory levels of each of the products and the appropriate inventory policies to maintain those levels. Achabal et al. For example. Nestle and Tesco (Watson. 2004).7 530 (Gavirneni et al. in spite of these advantages. 2007). 2002). 1999. we have also considered the performance of an outside supplier on the success of VMI programs. b). retailers are excluded from the demand forecasting process. 2002. For vendors. Vendor managed inventory (VMI). on the other hand. 1997).. Beside the internal dynamics of VMI. and (2) inaccurate demand forecast owing to the fact that under VMI. This may be because they only concentrate on the internal dynamics of VMI.. the following two factors may be extracted from these earlier studies as an explanation for failed VMI programs: (1) sharing of outdated or inaccurate sales and inventory data due in part to a lack of adequate information technology as well as a lack of mutual trust. it was subsequently implemented by many other leading companies from different industries. 2003a. 2002a. may have significant impacts on the . 1997b. 2003. Yao et al. Gavirneni. This is due to the fact that the primary beneficiary from information sharing is the manufacturers. Ovalle and Marquez.

1999. the contribution of information sharing on supply chain performance is substantially higher. Lau et al. Most of these research studies suggest that information sharing yields significant performance improvements for the supply chain. 2005. 2007). Gavirneni. Yu et al. Zhang and Zhang. The simulation approach has been used extensively in the literature for analysing supply chain systems (Waller et al. 1999. Lau et al. to the best of our knowledge. 2. we see that the results of the previous research studies differ considerably. the improvements realized in the performance of a supply chain enterprise through information sharing are also verified by many empirical studies (Zhou and Benton. In this study. a warehouse. 2002. 2002. 2004. This factor.. and a retailer. The reason behind these differences may be differences in modelling assumptions. Conclusions are in the final section. 1999. Information sharing is more beneficial under conditions where downstream level information is shared rather than upstream level information (Lau et al. 2003. Section 3 clarifies the methodology and development of the simulation model. and/or where inventory policies are reformulated to make better use of shared information Exploring the benefits of VMI 531 . a distributor. 2002a. Angulo et al. The next section reviews the previous literature related to information sharing and VMI with emphasis on the benefits of VMI. In this study. Each enterprise replenishes its inventory from its immediate upstream enterprise. 2002a. 2004. followed by simulation results.. 2007). 2005).. Setting of experimental design is identified in Section 4. Lee et al. is not explored in supply chain literature. Croson and Donohue. we considered a four-stage supply chain which consists of four echelons: a manufacturing plant.. Yao et al. For example.. Lee and Chu. the types of supply chain environment studied. 2000. 2004.. or cost structures used.. 2007). 2001. Zhang and Zhang. Some show that the value of information sharing is higher at higher levels of demand uncertainty (Lee et al. Croson and Donohue. in all cases. b. 2007). 2005. Under certain conditions... 2002. 2004. 2004). 2004. Moreover. the poor performance of the non-participating supplier may lead to a failure in VMI.. these differences among the contributions create confusion for SCM practitioners. b. Related literature There have been a number of analytical and simulation studies that have extensively examined the factors affecting the benefits derived from information sharing (Gavirneni et al. when we investigate the relationship between the benefits of information sharing and demand uncertainty. The plant has limited manufacturing capacity and produces a single product. Zhang and Zhang. we have used a simulation model in this study to investigate the benefits of VMI under more realistic circumstances. However. Lau et al.. Unlike many prior analytical studies which have very restrictive assumptions for the sake of mathematical tractability (Mishra and Raghunathan. The remainder of this study is organized as follows.benefits gained from VMI. however. Moreover.. Providing a meaningful explanation of these differences in the literature is another important contribution of this research study.. while others demonstrate that information sharing is more beneficial at low levels of demand uncertainty (Waller et al. 2007). 2000. Zhao et al. Zhao et al. Exploring the impact of non-participant upstream members on the performance of VMI is thus one major contribution of this research study.. we try to explore the impact of demand uncertainty on the performance improvements achieved by VMI. Simchi-Levi and Zhao. Gavirneni.

Aviv (2002) constructed a model of two-level supply chain consisting of a retailer and a supplier. we see that the results of the previous research studies differ considerably. while others demonstrate that information sharing is more beneficial under low levels of demand uncertainty (Waller et al. 2004). 2007). Waller et al. For example. we may also need to consider the research carried out by Lee and Chu (2005). Similarly. That is. mainly resulting from more frequent inventory reviews and shorter intervals between deliveries. (1999) carried out a simulation study in a two-stage supply chain to analyze the impact of VMI under various levels of demand variability. On the other hand. b) conducted a simulation study of a supply chain consisting of one capacitated supplier and four retailers and found that retailers needed to be encouraged to participate in information sharing. Lau et al. (2000) and Yu et al. 2000. Their results indicate that VMI provides greater inventory reductions and a higher utilization of manufacturing capacity. Aviv (2002) concentrated on the abilities of the supplier and the retailer to explain the uncertainty observed in customer demand. (2001.. 1999. and/or where supplier lead time is longer (Lee et al. Lee and Chu (2005) tried to identify the appropriate conditions under which VMI is desirable for both parties. Simchi-Levi and Zhao. where retailer lead time is shorter (Moinzadeh. we also realize that the benefits derived from information sharing are not distributed equally between suppliers and retailers.. Their results indicate that VMI is beneficial for both parties if the stock level desired by the supplier at the retailer location is higher than that desired by the retailer. Zhang and Zhang. This means that suppliers with their desired stock level at the retailer location can determine the retailer’s decision about participating in VMI or not. 1999. when we investigate the relationship between the value of information and demand uncertainty. analytical studies of Lee et al. These studies may explain why supply chain initiatives such as VMI have been popularized in industry as a tool for encouraging retailers to participate in information sharing. Yao et al. the perceived higher cost of stockouts for suppliers compared to retailers (Achabal et al. However. revealed that retailers’ benefits are insignificant when compared to the benefits gained by suppliers.. due to the fact that the benefits to retailers were insignificant from information sharing.. 2000) and/or. Gavirneni. In their analytical study. and partial channel coordination.7 532 (Gavirneni. The analytical and subsequent numerical study of Aviv (2002) indicates that the success of VMI programs mainly depends on the relative forecasting skill of the supplier. Results from his analytical model indicate that the cost savings realized from VMI are likely to be higher as more and more reduction is achieved in ordering cost of retailers through VMI. and/or where higher levels of manufacturing capacity is available (Gavirneni et al. Zhao et al. Similarly. 2002. 2004). 2002). with one supplier and one retailer. investigated the performance of VMI under different conditions. on the other hand. 2002. may explain the popularity of VMI in different industries. Gavirneni. 2000). (2002a. (2007) conducted an analytical study of a two-stage supply chain to identify the appropriate conditions under which implementing VMI is more desirable.. Other researchers. Lau et al..IJPDLM 37. 2002) in a two stage supply chain environment. their results . In his model. At this point. limited manufacturing capacity.. 2002). In order to better understand the underlying reasons behind the popularity of VMI. Some show that value of information sharing is higher at higher levels of demand uncertainty (Lee et al. 2003.

indicate that the performance of the supply chain under VMI could be even worse than the traditionally managed supply chain unless the relative explanation power of the supplier is sufficiently good. however. Here. They carried out a simulation study by using system dynamics modelling in order to evaluate the performance of various types of collaboration strategies. since there is no information sharing between members. each supply chain member uses an installation stock concept (i. R indicates the review interval and S indicates the order-up-to level. In both systems. 3. in order to eliminate this potential problem. Here. Order-up-to level. They presented the simulation results of a four-stage supply chain as described by Sterman (1989) in the article for the bear game. Angulo et al. S) inventory control policy is used for replenishment decisions. all supply chain members strive to develop local strategies for optimizing their own organizations without considering the impact of these strategies on the performance of other supply chain members. The simplified simulation logic and the flowchart are represented in Figure 1. unless it is highly inaccurate. is updated at the beginning of each week to reflect changes in demand patterns. members consider only their own inventory level) in their production/inventory decisions. Review interval (R) is chosen as one week. Statistical analysis of the simulation outputs indicated that the performance of VMI substantially decreases if the shared retail information is not up-to-date. we have used Crystal Ball. Two supply chain structures are considered in the model for comparison purposes. does not create substantial reductions in the performance of VMI. (2004) explored the impact of sharing inaccurate and delayed information on the performance improvements achieved by VMI in a four-stage supply chain both for stationary and non-stationary demand structures. The first structure is a supply chain operated under traditional ways of doing business (TSS) and the second structure is a supply chain model operated under a VMI program. The sequence of events followed by a supply chain member under TSS is outlined as follows: . Exploring the benefits of VMI 533 . supply chain members use only replenishment orders placed by their immediate downstream member. Finally. The supply chain simulation model At the initial stages of this research. however. an Excel add-in published by Decisioneering. Ovalle and Marquez (2003) reached similar conclusions as Aviv (2002). research conducted by Keeling and Pavur (2004) indicated that it might be possible for errors to occur in the random numbers generated by Microsoft Excel. which was ordered L periods ago (the lead-time is L periods). Therefore. we intended to use Microsoft Excel in constructing the simulation model. while creating demand forecasts and inventory plans. they also showed that when the inaccurate information is considered. Under TSS. The results of their study indicate that one important problem of VMI programs is the elimination of retailers from inventory and forecasting decisions. L is the production lead time. It is a popular risk analysis and forecasting program that uses Monte Carlo simulation in a spreadsheet environment. However. Moreover. The member receives the delivery from its immediate upstream member.e. an (R. Moreover. In a different research study. upstream stages are unaware of actual demand information at the market place. If the member is the plant.

Flow chart of the simulation model END .IJPDLM 37.7 START Parameters of Demand Structure Parameters of Capacity (CAP) 534 DEMAND GENERATION DETERMINATION OF THE PLANT'S CAPACITY Replenishment Orders Point of Sales Data DEMAND FORECAST (Exponential Smoothing) TSS SUPPLY CHAIN TYPE VMI DEMAND FORECAST (The Retailer and The Distribitor) CALCULATE ORDER-UP-TO LEVEL DETERMINE ORDER AMOUNT (The Retailer and The Distribitor) Inventory Level of Retailer Replenishment Orders CALCULATE ORDER-UP-TO LEVEL (The Retailer and The Distribitor) DEMAND FORECAST (The Warehouse and The Plant) DETERMINE ORDER AMOUNT DETERMINE ORDER AMOUNT (The Warehouse and The Distribitor) SATISFY INCOMING ORDER REPORT Average Supply Chain Inventory Total Supply Chain Cost Customer Service Level Figure 1.

we do not include this reduction in our simulation model. That is. operated in the same way as in TSS. 1993) in replenishment planning. are updated at the beginning of each week by using the exponential smoothing method (Nahmias. the member updates its order-up-to point. under VMI. Instead. All other echelons of the supply chain (the plant and the warehouse). estimated from the observed demand is as follows (Nahmias. 278): Sk ¼ F 21 k  bk bk þ hk  ð1Þ Exploring the benefits of VMI 535 . in this supply chain. the distributor takes the responsibility of managing the inventories of the retailer. under this structure. on the other hand. p. the distributor uses the echelon stock concept (Clark and Scarf. Therefore. 1999). Indeed. Under VMI. on the other hand. the distributor does not only need to take its own inventories into account while making inventory plans. This modification of order-up-to policy for the case of limited production capacity provides an optimal solution for uncertain demands (Gavirneni et al. the order is the market demand. because of its limited manufacturing capacity. If the member is the retailer.. respectively. F k ð:Þ. 1997. S k . In return. Here. If the member is the retailer. 1960. The member fulfils the customer orders (plus backorders if there are any) by on-hand inventory. we may surely state that the results obtained from this study constitute a lower bound for the benefits obtained from VMI.. a production order is placed. The member analyzes the historical replenishment orders placed by its immediate downstream member for forecasting.. In order to compute the echelon order-up-to levels of the retailer and the distributor. 74) to reflect changes in demand patterns. b). the heuristic developed by Shang and Song (2003) is used. p. Therefore. . 1997. where F k ð:Þ is the distribution function of the demand realized by the member at stage k. the exponential smoothing method is used to update the order-up-to level at each week. The member decides how many units to order from its immediate upstream member. the plant. ¨ Axsater and Rosling. cannot always produce enough to bring its inventory position up to the updated value of S. parameters of the demand distribution. 1986a. the retailer provides the distributor with access to its real-time inventory level as well as its point-of-sales (pos) data. Although the literature suggests that VMI may result in significant reductions in retailers’ lead times (Waller et al. but also the inventories of the retailer. Federgruen and Zipkin. Here. Again. Similarly. In these cases. Based on this demand forecast. The quantity of the order is equal to the difference between the order-up-to level and inventory position. The member observes the order placed by its immediate downstream member. 1999. the plant makes full capacity production by backordering the remaining requirement. here we have concentrated on information sharing and centralized decision-making aspects of VMI only. we assume that the retailer’s lead times remain constant after VMI implementation. . bk and hk are back-order and holding costs of the member at stage k. historical market demand data is analyzed. and any unfulfilled customer orders are backordered. If the member is the plant. The order-up-to point of the member at stage k.

the unit back-order costs per week for the plant. and 25. The g distribution. on the other hand. Keaton (1995). 0. A representative histogram of the market demand for the selected parameters is generated in Figure 2 to clarify the distribution of the market demand to the readers.25. 2. respectively. 0. and the retailer are $0.7 The cost structures for the supply chain members in the simulation model are assumed to be as follows. the distributor.2 0.50.05 117 157 197 237 277 317 357 397 437 477 517 557 597 0 Figure 2. Zhao et al. The variability in the scale parameter of the demand distribution allows us to generate both seasonal and non-seasonal customer demands. 3. 2004). 2002a.25 536 Probability 0. Histogram of the market demand when a ¼ 15 and bðtÞ ¼ 20 Market Demand . on the other hand. The values of the season constant for each demand structure are determined as 0.. Lau et al. and 1. The unit inventory costs per week for the plant. b. For example. while assigning zero to the season constant produces non-seasonal demand pattern. for instance. the warehouse. in order to avoid this unrealistic situation. There are two parameters of the g distribution.IJPDLM 37. The values of the season constant 0. does not have such problems because it allows only non-negative values. respectively. the g distribution is flexible in that it can represent a wide variety of demand structures. and the retailer are $5. bðtÞ is the scale parameter of the g distribution in week t. states that choosing g distribution is an effective choice to represent the demand patterns.1 Retailer’s demand structure Although normal distribution is more widely used in supply chain research studies...1 0. In the simulation model. and customer demand with high level of seasonality (HDV). 1999. The mean and the variance of the distribution can be expressed as ab and ab 2 . customer demand with medium level of seasonality (MDV). 11. normal distribution allows the occurrence of negative customer demand. These are customer demand with no seasonality (SDV). Therefore.15 0. is assumed to be a stochastic variable in the form of equation (1).   2p £t ð2Þ bðtÞ ¼ 20 þ season £ sin 52 In equation (2). the g distribution is used here to represent the customer demand realized by the retailer. some restrictive assumptions have to be included in the model (Waller et al. the warehouse.75. Moreover. we assume that the shape parameter of the demand distribution is 15 ða ¼ 15Þ: The scale parameter ðbÞ. For example. 4. respectively. the distributor. These are shape ðaÞ and scale ðbÞ parameters. assigning non-zero values results in seasonality in customer demand. respectively. Three demand structures representing different combinations of seasonality are used in this study.00. and. 18. This is due to the fact that there are some limitations in the normal distribution in representing demand structures.

the rest of the data was used for effective simulation output analysis. while SDV represent the non-seasonal customer demand. In addition to this variance reduction technique. Independent factors of the experimental design 1. Moreover.30 Exploring the benefits of VMI 537 Independent factors SCTYPE DV L CAP 1 TSS SDV 1 1. The factor L denotes the replenishment lead times between each member of the supply chain. available production capacity of plant (CAP). Finally. TSC is the sum of the inventory holding costs of all members in Levels 3 HDV 7 1. forecasting and production/inventory planning. Then. The factor CAP is expressed as the ratio of the plant’s total capacity to the total market demand.10 2 VMI MDV 4 1. the random demand variables generated in the simulation model are plotted on a scatter diagram. These factors are average inventory level in the supply chain (INV). total cost for the entire supply chain (TSC) and customer service level of the retailer (CSL). Each part is designed separately so that more efficient and effective debugging is made possible. type of supply chain (SCTYPE). Experimental design Four independent factors are considered in the experimental design. equally.50 . The number of levels of these variables and their values are listed in Table I.2 Verification and validation of the simulation In order to verify that the simulation program performs as intended. this factor indicates whether the supply chain is operated under TSS or VMI. same customer demand was generated for both types of supply chain system.40 1. 3.are selected in such a way that both non-seasonal and seasonal customer demands with different strengths are generated. and order fulfillment and reporting. the combined simulation model is also traced and tested with the results calculated manually. which were removed later from the output analysis to eliminate the worm-up period effect. Factor SCTYPE refers to the way the supply chain is operated. uncertainty in customer demand (DV). These are. Specifically. Three kinds of factors are used as dependent variables in the experimental design in order to evaluate benefits gained from VMI. in order to validate the simulation output. The initial parameters of the forecasting model were estimated with the first 400 weeks of simulation run. and replenishment lead times (L). 4. the same random numbers were used to simulate both systems. it is validated that the intended demand structure is generated. the factor DV indicates the level of uncertainty seen in market demand. Therefore. For example. the conceptual model is divided into three parts: demand generation and determination of total manufacturing capacity. MDV and HDV represent the demand structures with seasonal swings of the size of approximately 10 and 20 percent of average demand.20 4 5 Table I. That is. 15 replications for each combination of the independent variables were conducted. Later. The supply chain model above was simulated for 1. In order to reduce the impact of random variations. respectively.128 weeks. Total capacity of the plant is distributed to each week.

611 1.260 0.198 1.629 6.0000 0.0000 0.0009 0.0000 0.218 3.943 1.995 248.899 1. 331).013 608.2821 0.3180 0.785 1.0000 0.70 96. Simulation output analysis The output from the simulation experiments is analyzed using the MANOVA procedure of the SPSS.479 2.52 96.928 4.0000 0.0000 0.963 1701 .110 47.090. F 3.0000 0. Performance of each type of supply chain INV (unit) SCTYPE TSS VMI TSS VMI TSS VMI Average 94.0000 0.371.245 20.0000 0. The MANOVA procedure is more appropriate for our model because it considers the correlation between the dependent variables in the experimental design.293 0.0000 0. p. F 127.2821 0.021 0.252 4.727 1.0000 0.0000 0.854 28.424 3. which indicates that VMI has substantial influences on the performance of the supply chain. Selected MANOVA results are presented in Table II. Here. because all other back order costs are internal costs within the entire supply chain and they are not actually incurred.197 33.0000 0. The performance of each type of supply chain is presented in Table III.956 1694 95 percent confidence interval Lower bound Upper bound 94.189 1.0988 0.325 4.439 570.148 5.316 Pr .604 85.735 7.476.0000 0. (1998.572 21.0000 0.0000 0.0000 0. F 0.379 26. Dependent variables INV F-value Pr .0000 0.0000 0.560 58.510 547.0000 0.08 701.321 0.366 1.7746 0. 5.9820 0.0000 0.123 40.761 577. MANOVA results in Table II show that at 5 percent significance level.900 8.413 0. For more detailed information about MANOVA see the paper by Hair et al.211 18.518 157.95 685. we include the back order cost of the retailer only.949 1686 94.5622 0.0000 0.536 444.013 0.7 the supply chain and backorder cost of the retailer.107 1.3450 538 CSL Source SCTYPE CAP L DV SCTYPE *CAP SCTYPE *L CAP *L SCTYPE *CAP *L SCTYPE *DV CAP *DV SCTYPE *CAP *DV L *DV SCTYPE *L *DV CAP *L *DV SCTYPE *CAP *L *DV F-value 85.666 2.0000 0.35 95.0000 0.268 10.818. Selected MANOVA results Note: aBased on residual analysis. log transformation of TSC was made to satisfy the assumptions of ANOVA Performance measures CSL (percentage) TSC ($) Table III.9985 Table II.0000 0.846 72.223 5. Factor CSL is the percentage of customer demand satisfied by the retailer through the available inventory.455 4.0000 0.0001 0.130.9989 0.294 0. SCTYPE has significant impacts on all three-performance factors.9953 TSC (a) F-value Pr .782 0.0000 0.0000 0.0000 0.0000 0.IJPDLM 37.0000 0.21 718.075 39.0287 0.

For example. This result is very interesting. so we will not concentrate on them further.4 percent. when we consider the average inventory level of the supply chain we see a very similar situation with supply chain cost. Therefore. we see that under all levels of manufacturing capacity. Similarly.3 percent on the average.10 1. these findings are simple and intuitively expected for us.6 to 21 percent. Finally. For this purpose. 24 20 16 12 8 4 0 1 25 20 15 10 5 0 1.50 4 L 7 98 97 96 95 94 93 92 24 20 16 12 8 4 0 SDV MDV DV HDV 98 97 96 95 94 93 92 Reduction in TSC and INV (%) Reduction in TSC and INV (%) Exploring the benefits of VMI 539 CSL (%) 97 96 95 94 93 92 Reduction in TSC and INV(%) CSL (%) TSC INV CSL of TSS CSL of VMI CSL (%) Figure 3.3 percent with an average around 17. Examination of Figure 3 shows that the reduction amount in total supply chain cost is significantly higher at larger levels of capacity at the plant.1 Capacity of non-participated member MANOVA results in Table II show that at 5 percent significance level. performance of VMI under various capacity levels (CAP). the reduction in total supply chain cost varies from 6.Examination of Table III reveals that compared to TSS.30 CAP 1. these findings show us that VMI produces substantially higher benefits at higher levels of the manufacturing capacity. This means that capacity level of non-participated member has a significant influence on the performance of VMI for all three performance measures. Overall performance of VMI . we will concentrate on how a non-participating member’s manufacturing capacity (CAP) affects the benefits of VMI as well as the uncertainty in customer demand (DV) and lead times (L). For example. the reduction amount in total supply chain cost increases from 14.50. VMI produces higher fill rates than TSS. In addition. Therefore. demand uncertainty (DV).6 percent. these results lead us to conclude that VMI produces substantial increases in the retailer’s customer service level while decreasing average inventory level and the total cost of the entire supply chain.10 to 1. Actually. the interaction effect between CAP and SCTYPE has significant impacts on all three dependent factors.40 1. Instead. when the customer service level is considered. while the customer service level under TSS is 94.5 to 43. and lead times (L) are produced in Figure 3. The results also indicate that VMI significantly increases the retailer’s service level. the reduction in average inventory level in the supply chain is 13. 5. on the average when capacity ratio (CAP) increases from 1.20 1. it is around 96 per cent under VMI.

in this supply chain. Zhang and Zhang. Our research. Simchi-Levi and Zhao. In contrast with these results. answers of the following two questions play a critical role in determining the value of information sharing under different levels of demand uncertainty. Lau et al. These are: (1) Which types of information are shared among supply chain partners? (2) Under what conditions are these information shared? Here. The underlying reasons for this apparent contradiction between these studies may be differences in modelling assumptions. 2004). The result obtained here is consistent with previous research studies (Gavirneni et al. the supply chain environment studied. VMI produces higher level of service. 2000. Lau et al. the reduction in total supply chain cost and average inventory level are realized as 24 and 16 percent. This indicates that uncertainty in customer demand has a significant influence on the performance of VMI for all three performance measures. 2003. 2002... researchers suggest that benefits obtained from information sharing substantially decrease with respect to in-house capacity restriction. in these earlier studies. Examination of Figure 3 shows that the reduction in total supply chain cost and the average inventory level achieved by the VMI program reduce as the level of demand uncertainty increases.. among these reasons the most influential ones are related to the type of information sharing strategy implemented.IJPDLM 37.2 Uncertainty in customer demand MANOVA results in Table II show that at 5 percent significance level. we see from Figure 3 that when there is no seasonality in customer demand. 2007) show that information sharing is more beneficial at higher levels of demand uncertainty. information of a retailer about an upcoming promotion is fully transferred to the upstream members along with sales and inventory data. however. the findings of other researchers (Lee et al. but its manufacturing capacity has a significant influence on the performance of VMI.7 540 That is. That is. Of course. extended the results obtained from these earlier studies by indicating that capacity restriction of non-participated suppliers also substantially reduces the benefits derived from VMI. In the second strategy.. For example. However. as also indicated in some earlier studies (Waller et al. or cost structures used. however... when there is a high-degree of seasonality. the benefits obtainable from these two strategies under different levels of demand uncertainty vary. only inventory and sales data are shared. While some types of information sharing strategies involve almost all relevant descriptions about uncertainty of probable future demand that exists in the system. we see that under all levels of demand uncertainty. under the market conditions where . Gavirneni. the plant does not participate in the VMI program. let us consider two information sharing strategies. the interaction effect between DV and SCTYPE has a significant impact on all performance factors. 5. when we consider the other performance criteria. 2000. In the first strategy. 2004). Gavirneni. some others convey only partial information to help supply chain partners in resolving uncertainty. That is. 1999. Moreover. 2002. 1999. respectively. these savings decreased to 15 percent for the total supply chain cost and 9. Lee et al. the benefits obtained from the former strategy.3 percent for the average inventory level. Namely. However. The results obtained here show us that the uncertainty in customer demand substantially reduces the benefits obtained from VMI.

As a result.90 percent at a lead time of one week. Moreover. Similarly. it provides 1. On the contrary. Current literature on information sharing indicates that performance increase achieved by information sharing under longer supplier lead time is quite substantial and it increases with respect to the supplier lead time (Lee et al. 2000).3 Lead times MANOVA results in Table II show that at 5 percent significance level. One major contribution of this research is to explore the influence of capacity restriction of an outside supplier on the performance of VMI. Conclusions This paper explores the benefits of VMI in supply chains involving four stages by providing important insights into the performance of VMI under various supply chain scenarios. Through comprehensive simulation experiment and subsequent statistical analysis of the simulation outputs. it can be said that information sharing is more beneficial at higher levels of demand uncertainty as long as the type of information shared can help supply chain members in resolving the uncertainty observed in customer demand. which are characterized by demand uncertainty and lead times. This means that while reduction in average inventory level and increase in customer service level realized from VMI change with lead times. as long as the ratio of the retailer’s lead time to that of the supplier’s remains constant.much of the uncertainty stems from product promotions. That is. the performance increase achieved by VMI under various supply chain scenarios. are also explored extensively. Examination of Figure 3 shows that the inventory reduction obtained from VMI is higher at shorter lead times.95-points higher fill rate than TSS when the lead times are one week. the interaction effect between L and SCTYPE has a significant impact on the customer service level and supply chain inventory. Otherwise. Therefore. but by very small amounts. while the inventory reduction is 13. are substantially higher.. VMI produces nearly the same level of performance increase. 6. 2002). reduction of supply chain cost gained from VMI does not change with lead times. these slight performance improvements in service level and average inventory level are not reflected in total supply chain cost as can be seen in Table II and Figure 3. Similarly.10 percent at a longer lead time of seven weeks. it is 13. we make the following important findings: Exploring the benefits of VMI 541 . For example. This paper extends the current literature and provides valuable information for SCM practitioners by indicating that VMI or information sharing provides nearly the same level of performance increase in supply chains where lead times are short or long. the literature also suggests that performance increase achieved by information sharing is lower under longer retailer lead time (Moinzadeh. but it does not have any significant impact on the total supply chain cost. the value of the second strategy substantially decreases as uncertainty comes from product promotions increases. 5.14-points higher fill rate when the lead times are seven weeks. higher levels of demand uncertainty will definitely reduce the benefits obtained from information sharing as has also been seen in this research. while it produces 1. we also see that VMI provides a little higher performance in fill rates at shorter lead times. from these results. However. we can conclude that regardless of the lead time horizon.

In addition. This finding. unless the shared information provides additional information to the vendor to resolve uncertainty in customer demand. Journal of Business Logistics. 1. S. and Lee. “Stock replenishment and shipment for vendor-managed ¸ inventory systems”. This is only a simplified case and in future researches. we also realize that capacity restriction of a non-participated supplier is more crucial when the demand uncertainty in customer demand is high. Y. 217-32. pp. 4 No. “Gaining benefits from joint forecasting and replenishment process: the case of auto-correlated demand”.IJPDLM 37. S. Journal of Retailing. First. “Supply chain information sharing in a vendor managed inventory partnership”. however. . we examine the impact of lead times on the performance of VMI. Our simulation study indicates that as the manufacturing capacity of the outside supplier decreases. 1. C.A.D. Management Science. A. Although this study provides some insights into VMI and its relationship with outside suppliers as well as demand uncertainty. shows that success of VMI programs does not depend only on internal dynamics of VMI. but also on external factors. 2. and Waller. Forth.7 542 (1) We examine that there are substantial decreases in the performance increase obtained from VMI as the uncertainty in customer demand increases. we assume that the members in the supply chain use modified or simple order-up to policy to make their inventory decisions. D. We observe that. Manufacturing & Service Operations Management. Third. significantly reduce the retailer’s lead time. ¨ Axsater. the benefits obtained from VMI also decreases substantially.Y. (1993).H. Smith. S. modelling more realistic supply chain structures will better explain the results obtained from this research. Angulo. Management Science. 39 No. interestingly. (2002). we considered a serial supply chain structure with one member at each echelon.. regardless of lead time horizons. Vol. 55-74. K. “Notes: installation vs echelon stock policies for multilevel inventory control”. (2000). VMI provides nearly the same level of performance increase as long as the ratio of the retailer’s lead time to that of the supplier’s remains constant. pp. M... 10. managers in a supply chain enterprise have to make careful benefit/cost analysis while making their decisions regarding VMI implementation under conditions where the performance of upstream members is poor and/or uncertainty in customer demand is high. 1274-80. in the simulation model. This is because the higher demand uncertainty in customer demand also reduces the benefits derived from VMI. there are some limitations that we have to state. Aviv. 4. the cost structure used in the model only represents one special case. Vol. Vol. Second. pp. McIntyre. VMI may. 46 No. H. S. in fact. 101-20. K. we assumed that the retailer’s lead time remains constant after VMI implementation. and Rosling. pp. (2) We examine that the performance of outside supplier plays an important role for the success of VMI programs. 25 No. and Kalyanam. (2000). Vol. however. “A decision support system for vendor managed inventory”. pp. 430-54. (3) Finally. 76 No. In conclusion. Vol.A. References Achabal. (2004). there are other inventory or production policies that can be included in the model. Nachtmann. Cetinkaya.

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(2002a). “Supply chain practice and information sharing”. and Towill. X. Zhou. 1. and Zhang. Supply Chain Forum: An International Journal. 7 No.emeraldinsight. 1 No. 321-44.C. 40-5. Zhao. Vol. “Design and simulation of demand information sharing in a supply chain”. pp.edu.. Vol. and Leung. “The impact of information sharing and ordering co-ordination on supply chain performance”. (2000).com Or visit our web site for further details: www. D.tr Exploring the benefits of VMI 545 To purchase reprints of this article please e-mail: reprints@emeraldinsight. J. W. 15 No. R. and Benton. Jr (2007). H.J. “Coping with uncertainty: reducing ‘bullwhip’ behaviour in global supply chains”. 142 No.. 2. Supply Chain Management: An International Journal. 1. X. (2002b). pp.com/reprints . 1. Journal of Operations Management. pp. W.R. “The impact of forecasting model selection on the value of information sharing in a supply chain”. 24-40. Further reading Mason-Jones. Vol. and Zhang. (2007). J. European Journal of Operational Research. Simulation Modelling Practice and Theory. C. Zhao. 32-46. Corresponding author Kazim Sari can be contacted at: kazims@beykent. Xie. Vol. C. pp. J.Zhang. Xie.

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