Pricing in Supply Chain under Vendor Managed Inventory

The successful implementation of supply chain management depends on many soft issues (strategic/behavioural) such as organizational resistance to change, inter-functional conflicts, joint production planning, profit sharing, team oriented performance measures, channel power shift, information sharing, real time communication, inventory and technical compatibility (Min & Zhou 2002). Many of the above issues in SCM are conceptually addressed and lot of scope exists for improving the performance of SC with good modelling. The soft issues of supply chain models can be dealt through proper information sharing, communication and coordination between the stages of supply chain. Vendor managed inventory (VMI) is a proven concept for successful collaborative and cooperative agreements in supply chain. While research has been slowly increasing in the area of vendor managed inventory, it has received very little attention in current operations literature. This chapter focuses on the soft issues of profit sharing and pricing under vendor managed inventory systems. Two vital parameters that govern the operation of a supply chain are: sales price at buyers market, and contract price between vendor and buyer. Sales price is significant in the sense that it determines the overall profit of the supply chain, referred here as channel profit. This chapter proposes five mathematical models under VMI environment for determination of optimal sales quantity for each buyer which maximizes the channel profit and subsequently to derive the sales and contract price from the optimal sales quantity.