Exploring the benefits of vendor managed inventory

Purpose – The purpose of this paper is to explore the performance increase achieved by vendor managed inventory (VMI) under different levels of outside supply capacity, demand uncertainty, and lead time. Design/methodology/approach – The study uses discrete event simulation to explore the performance increase achieved by VMI under different supply chain scenarios. Findings – The analysis suggests that when implementing a VMI program, the capacity restrictions of suppliers have to be taken into consideration even though they have not participated in the program. Furthermore, the results also show that unless the retailer provides additional information to the distributor to resolve the uncertainty, higher levels of uncertainty in market demand create significant reductions in the savings realized by VMI. Finally, this study proves that, regardless of lead time horizons, VMI provides nearly the same level of performance increase as long as the ratio of the retailer's lead time to that of the supplier's remains constant. Practical implications – This analysis provides a means for practitioners to understand the impact of various environmental and operational factors on the performance increase achieved by VMI so they can better analyze their specific business conditions to prepare their organizations for more successful VMI programs. Originality/value – Although there is a range of research focusing on VMI, only a few of those have tried to identify the factors that play an important role in the failure of VMI programs. While extending the current literature, this is the first study to explore the impact of outside supply capacity on the performance improvements achieved by VMI.