Allocating Cost of Service to Customers in Inventory Routing

Vendor managed inventory (VMI) replenishment is a collaboration between a supplier and its customers where the supplier is responsible for managing the customers’ inventory levels. In the VMI setting we consider, the supplier exploits synergies between customers, e.g., their locations, usage rates, and storage capacities, to reduce distribution costs. Due to the intricate interactions between customers, calculating a fair cost-to-serve for each customer is a daunting task. However, cost-to-serve information is useful when marketing to new customers, or when revisiting routing and delivery quantity decisions. We design mechanisms for this cost allocation problem and determine their characteristics both analytically and computationally.