Without VMI
Prior to implementing VMI, our model is the same
as the classic economic order quantity (EOQ) model
in inventory management. Therefore, the optimal
order quantity and total inventory cost for the buyer
can be easily obtained. The EOQ and total inventory
cost are calculated as follows
where r is the annual demand in units; c is the cost of
placing a single order; h is the carrying charge per unit
per year; q is the lot size or order quantity in units; tc
is the total inventory cost; and * indicates the optimal
value.
Similar to the buyer’s, the supplier’s decision is to
determine the economic order quantity that minimizes
its total inventory costs. Therefore, we have