Vendor-managed inventory in a global environment with exchange rate uncertainty

Vendor-managed inventory (VMI) is a well-known industry practice for supply chain collaboration. In this paper we consider a periodic-review stochastic inventory model to examine the benefits of VMI in a global environment, in which the supplier and the retailer face exchange rate uncertainty and incur different fixed ordering costs. Our study suggests that, despite of all the inventory costs transferred from the retailer, the supplier can benefit from VMI by achieving economies of scale in production/delivery. It also suggests that the supply chain total cost always decreases under VMI and the reduction of the supply chain total cost is larger when there is exchange rate uncertainty, compared with the case of no exchange rate uncertainty. We also provide some analytical results, including the optimality of a state-dependent (s, S) policy for the supplier. (C) 2010 Elsevier B.V. All rights reserved.