The incentive issues in VMI contractual agreements are also studied in VMI
literature. Fry, Kapuscinski and Olsen (2001) model a specific (z,Z)-type of VMI
agreement in a supply chain environment with a single manufacturer and a single
retailer with stochastic demand and compare the VMI system with a traditional case
under full information sharing. In this type of contract, the retailer sets the inventory
levels, z and Z, that represent the lowest and highest inventory levels, respectively.
The manufacturer should keep the retailer‟s inventory level between these specified
levels. The manufacturer follows a fixed production schedule, but can replenish the
retailer in any period and she incurs a penalty cost if she cannot keep the retailer‟s
inventory level between the specified levels. They make a comparison between the
VMI system and the traditional system with information sharing and find that VMI
can perform significantly better than the traditional case in many settings but can
perform worse in others. Their numerical analyses also show that when the
outsourcing cost and the demand variation is high, VMI performs close to a
centralized system