Behaviors and Performance Improvement in a Vendor-Managed Inventory Program: An Experimental Study

Abstract

© 2019 Production and Operations Management Society Although vendor-managed inventory (VMI) programs have gained popularity in practice, some empirical studies report that their implementations have not been successful. We conduct experiments to investigate behaviors in a supply chain where a supplier replenishes inventories for a retailer according to a VMI program under a revenue-sharing contract. The results show that subjects’ decisions deviate significantly from the standard theoretical predictions because the retailer presents equality preference with adjustment, and the supplier exhibits fairness concern. Since the supplier bears not only the production cost, but also the risk of leftover inventory in the VMI program, we propose an approach that provides the retailer with an opportunity to voluntarily compensate the supplier with an additional percentage of revenue after demand realization. Experimental results based on this new operational procedure show that the retailer still presents equality preference with adjustment, but the supplier has a decision bias of ex post inventory error regret. The supply chain can perform better under the proposed approach than under only a revenue-sharing contract. Interestingly, the proposed approach does not cause the retailer to share a higher percentage of revenue with the supplier, but it induces the supplier to replenish a higher stock quantity, which leads to higher profits for both the retailer and the supplier.