A DETERMINISTIC VENDOR MANAGED INVENTORY MODEL UNDER TWO PAYMENT POLICIES: CASH ON DELIVERY AND CASH BEFORE DELIVERY

Abstract

Vendor managed inventory (VMI) is a concept of supply chain in which a vendor (supplier or manufacturer) has the charge for optimizing the inventory held by a buyer (or retailer). In traditional VMI modelling, it is often assumed that the vendor offers cash on delivery payment terms to the buyer. But in real world the vendors usually offer different types of payment policies to promote their commodities and influence the buyers ordering policies. Some of the common payment policies are cash on delivery, cash before delivery (advance payment), delayed payment (trade credit) etc. In the present paper mathematical model is developed for VMI system by comparing two payment policies between vendor and buyer. In policy (I) buyer pays for an items as soon as he receives it from the vendor, i.e. CASH ON DELIVERY and in policy (II) buyer pays for an item at the time of placing an order, i.e. CASH BEFORE DELIVERY. Discounted cash flow (DCF) approach has been used for proper recognition of cash flows. Numerical illustrations and sensitivity analysis are performed between two payment policies and it is shown that VMI system is beneficial for both vendor and buyer under both payment policies and policy II is better than policy I for both VMI system and non VMI system.