Supply chain coordination using consignment sales-vendor managed inventory (CS-VMI) contract

Abstract

The purpose of this paper is to study the effectiveness of consignment sales – vendor-managed inventory (CS-VMI) contract between the consignor (manufacturer) and the consignee (retailer). The research explores how such a contract can enhance supply chain performance, primarily when supplying products with a short selling season. Specifically, it aims to establish settings for demand variability and cost structures under which the CS-VMI contract would benefit stakeholders. Building on the traditional newsvendor model, the paper formulates an optimal CS-VMI policy wherein the consignor (manufacturer) places inventory with the consignee (retailer) to increase market exposure. In contrast, the consignee pays the consignor only upon the sales of the product. The research demonstrates analytically how the commission rate can be derived and negotiated to enable risk hedging by the consignee and make the CS-VMI contract incentive-aligned and equitable for both parties. Numerical results reveal that the optimal consignment inventory is contingent on demand variability, the loss of goodwill penalty, and the commission rate.