The conditions of inventory cost for the supplier adopting VMI strategy

VMI (Vendor Managed Inventory, VMI) is more beneficial to the client; however, the supplier has to bear risk transferring from the customer enterprise (such as an increase in inventory cost) as well as the bullwhip effect risk in supply chain. Therefore, the implementing VMI of the supplier is conditional. This paper quantitatively analyzes the inventory cost of both the supplier and the client before and after implementing VMI, using the two-tier supply chain relationship model which focus on the inventory system, and analyzes the necessary and sufficient conditions of the supplier adopting VMI strategy based on inventory cost. No increase in the total inventory cost of the supply and demand system is the necessary condition for the supplier to implement VMI, and the sufficient condition is that VMI will reduce the supplier's inventory cost. Only when these two conditions are met, the supplier will be positive to VMI. (3 pages)