Ordering and pricing policies under vendor managed inventory and consignment arrangements

This paper addresses joint pricing and ordering decisions for a decentralized distribution system. This study formulates four profit-maximization models and conducts equilibrium analysis for the two-echelon system with one wholesaler and multiple retailers under various policies, such as the individual replenishment, coordinated replenishment, VMI-only, and VMI coined with consignment contractual arrangements. Additionally, the geography of the efficient frontier is constructed to illustrate the feasible region of Pareto improvements from the channel-wide aspect. Our analysis reveals that the coordinated replenishment and VMI-only policies tend to set a higher retail price and, as a consequence, generate a lower profit. However, consistent bias can be rectified by a cooperative wholesaler under VMI with consignment arrangements, leading to increased channel-wide profit and efficiency.