Impact of consignment inventory and vendor-managed inventory for a two-party supply chain

Vendor-managed inventory (VMI) and consignment inventory (CI) are supply-chain sourcing practices between a vendor and customer. VMI allows the vendor to initiate orders on behalf of the customer. This presumably benefits the vendor who can then make replenishment decisions according to her own preferences. In Cl, as in the usual independent-sourcing approach to doing business, the customer has authority over the timing and quantity of replenishments. Cl seems to favor the customer because, in addition, he pays for the goods only upon use. Our main aim is to analyze CI in this supply chain under deterministic demand, and provide some general conditions under which Cl creates benefits for the vendor, for the customer, and for the two parties together. We also consider similar issues for the combined use of CI and VMI. (C) 2008 Elsevier B.V. All rights reserved.