This research provides practitioners with a convenient and useful tool for making decisions with respect to supply chain integration programs. In a
business setting, the three supplier/buyer ratios in
our model–order costs without VMI, order costs
with VMI, and carrying charges–can often be relatively easily observed. Therefore, buyers and suppliers should be able to obtain at least some idea as to
whether a program such as VMI is likely to produce
firm and supply chain inventory cost reductions, and
by how much. Our model indicates, for example, that
inventory cost savings are likely to be higher if the
buyer’s order cost is significantly reduced by implementing VMI. The potential inventory cost savings
can then be compared to the cost of implementing a
VMI program (e.g., the technology and labor costs
associated with establishing a system), with VMI
implementation undertaken when the potential inventory cost savings are thought to be greater than the
costs of implementation. The finding of disproportional benefit distributions, then, provides the supplier and
buyer with a better understanding and an important
benchmark in their negotiations for proper side-payment arrangements should they be required.