Optimal inventory decisions under vendor managed inventory: Substitution effects and replenishment tactics

Abstract This paper introduces a two-echelon supply chain that markets two substitutable brands of a product with uncertain demand. The supply chain employs the vendor-managed inventory model wherein suppliers take responsibility to manage the inventory for the retailer. Four inventory models are discussed in the paper. In the basic model, the two brands are supplied by two different suppliers. The optimal decisions for the supply chain are identified and the impacts of substitution effects are discussed. Then the model is extended so one of the suppliers can replenish his brand in the selling season. In the third model, a special case is considered in which the two brands are exclusively provided by only one supplier. At last, replenishment tactics are introduced into the model when two brands are exclusively provided by only one supplier. We obtain optimal solutions for all models when substitution effects are considered. Numerical examples are provided to illustrate our findings and validate our results.