A Reinforcement Learning Approach for Inventory Replenishment in Vendor-Managed Inventory Systems With Consignment Inventory

The use of VMI at Wal-Mart on a large scale has attracted a great deal of attention in the industrial world. In a VMI program, the supplier assumes control of the inventory management for one or more retailers (Fry, 2002). The supplier monitors the inventory level at the retailers and makes the decisions related to the quantities of replenishment and the timing of shipments to the retailers. It has been claimed that this can play a significant role in reducing the bull-whip effect. Compared to traditional retailer-managed inventory (RMI) programs in which retailers are responsible for placing orders and are entirely responsible for their own inventory shortages or excesses, VMI can bring benefits to both retailers and manufacturer, as discussed next. Some of the advantages for the retailer are as follows: Increase in the service level: • As the supplier has access to databases at the retailer and to the current demand at the retailer, the supplier can better coordinate its own activities of supplying materials to its various customers. As a result, the out-of-stock situation is rarely encountered at the retailer, improving its service levels. Reduction of inventory levels: • Since the supplier has access to inventory databases at the retailer, the supplier is able to coordinate replenishment decisions in a way that keeps inventory levels at the retailer from being excessive. This leads to reduced holding costs and increased inventory turns at the retailer. Reduction of ordering and planning costs: • Ordering and planning costs are eliminated (or reduced) for the retailer since the responsibility of ordering/planning is shifted to the supplier.