A Dual-Channel Vendor-Buyer System with Minimum Purchase Commitment

In this paper, we consider a dual-channel vendor-buyer system consisting of a buyer and two vendor-owned facilities: a central distribution center (DC) and a regional DC. Orders for a single item are delivered through two distinct channels: an indirect channel, comprising the central DC, the regional DC and the buyer; and a direct channel, comprising the central DC and the buyer, bypassing the intermediate regional DC. Each facility periodically replenishes its inventory at a common time interval and safety stock is carried at each facility to maintain the desired service level. The vendor and buyer make a minimum purchase commitment (MPC), under which the buyer commits to purchase a predetermined and fixed quantity through the direct channel in each time period, and has the option to purchase a flexible quantity through the indirect channel in each time period, We study the impact of the MPC agreement on the inventory and safety stock at the vendor and buyer for this dual-channel vendor-buyer system, and introduce a simulationbased method to estimate this impact for iid normally distributed demand. We also study an integrated coordination problem in which the vendor and buyer cooperate to implement the optimal MPC agreement that minimizes total system cost.