A vendor managed inventory policy with emergency orders

Due to the large amount of money engaged with inventory along supply chains, especially with inventory holding costs, it is extremely important to employ a good inventory policy in order to meet the customer demand without delays. This paper presents a vendor-managed inventory policy with emergency orders, for a supply chain which consists of a single vendor and a single retailer where the retailer faces Poisson customer demand. Two mathematical models were developed using two approaches. Approach 1 used the concept of demand rate while approach 2 is based on total demand received during the cycle. The formulated models are used to determine the optimal base stock level, delivery quantity to the retailer and cycle length such that the total expected inventory cost is minimized. Numerical experiments and sensitivity analysis were conducted to examine the behavior of the optimal solution and provide general guidelines and implications.