A buyer-vendor system with untimely delivery costs: Traditional coordination vs. VMI with consignment stock

Abstract This paper investigates the impact of coordinating a two-level supply chain that consists of a single-vendor and a single-buyer in the presence of untimely delivery costs. Specifically, early and late deliveries outside an agreed delivery window are penalized. We investigate the replenishment policies of the vendor and the buyer with and without coordination. We show that untimely deliveries increase the replenishment cycle of the buyer, whether it coordinates with the vendor or not. More importantly, under untimely deliveries, coordination has a noticeable impact in aligning decisions of both players, thus is shown to be much more valuable in decreasing total costs. The implementation of a coordinated solution becomes especially beneficial when penalty and holding costs of the vendor are high, the delivery window is narrow, and the holding cost of the buyer and fixed ordering costs are low. Next, we compare the traditional replenishment coordination mechanism with a vendor-managed-inventory(VMI) mechanism with consignment stock(CS) under untimely deliveries. We show that while the performance of a VMI-CS system is poor when delivery times are deterministic, it outperforms a traditional coordination mechanism when they are not.