Vendor Managed Inventory (VMI) with Consignment Stock (CS) agreement for a two-level supply chain with an imperfect production process with/without restoration interruptions

A vendor managed system with the Consignment Stock agreement is a business practice where a buyer's inventory remains the property of the vendor until its withdrawal by the final customer demand. Such an agreement has shown to be a profitable stock management approach, especially when operating in uncertain environments where delivery lead times and/or market demand vary over time. One main issue that has been addressed in the literature on supply chain coordination is when a vendor's production process is imperfect; i.e., it generates defective items that are either reworked or scrapped. From the available works that investigated coordinating orders between a vendor and a buyer with imperfect production, to the authors' knowledge, no one has considered a Vendor Managed Inventory (VMI) with the Consignment Stock (CS) agreement as a policy where the vendor's production process is imperfect. This paper also introduces various managerial decisions pertaining to imperfect items, specifically, reworking items and applying minor-setups for restoration. A mathematical model is developed to determine the optimal production-inventory policies for various possible scenarios. The managerial decisions incorporated in this model give it the flexibility required to adapt to a firm's production situations and needs as may arise due to the nature of different industries and businesses. Significant findings include that accounting for imperfect items with Consignment Stock practice increases the batch size, reduces the number of batch shipments per cycle, and reduces the overall cycle time. Further, introducing minor setups for restoration reduces the overall cost of the system. & 2014 Elsevier B.V. All rights reserved.