Effectiveness of vendor managed inventory approach in a two-stage supply chain when demand rates are static

Vendor Managed Inventory (VMI) is an effective policy of integration between the different stages in a supply chain system. In VMI, the supplier takes the responsibility of maintaining inventory at its retailers and ensuring that they will not run out of stock at any moment. The aim of this paper is to optimize the inventory holding costs and the transportation costs of the retailers within the same set partition and/or combining the retailers in the different set partitions, for a two-stage supply chain. The problem is to determine the delivery quantities as well as the times and routes to the retailers, while ensuring feasibility regardless of the realized demands, and minimizing the total cost composed of distribution and inventory holding costs. In the proposed approach, retailers are first clustered to determine the possible retailers set partitions and are then replenished using an optimal routing strategy satisfying some additional restrictions. The improvement of the system’s performance is shown and discussed in the comparative analysis section.