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Stochastic Model for Consignment - A Stochastic...

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A Stochastic Single-vendor Single-buyer Model under a Consignment Agreement Ou Tang', Simone Zanoni^ and Lucio Zavanella^ ' Department of Management and Engineering, Linkoping Institute of Technology, SE-581 83 Linkoping, Sweden ^ Dipartimento di Ingegneria Meccanica e Industrial, Universita degli Studi di Brescia, Via Branze, 38, 25123 Brescia, Italy Abstract. In the recent years, companies have begun to strengthen their supply agreements, such as sharing the management of inventories. This type of co- operation implies that the members of the supply chain share information and arrange a mutual agreement on their performance targets. The increased interest on supply chain topics has attracted researchers' attention to the problem of co-operation between the buyer and vendor, the two actors directly interacting in the supply mechanism. The present research investigates the way how a particular VMI policy, known as Consignment Stock (CS), may lead to a successful strategy for both buyer and vendor. The previous study [1] developed an analytical model of the CS policy, with reference to the centralised decision and deterministic settings. In order to fully explore the potentiality of CS policy, an extension of the model is proposed in this paper. The results indicate that the CS policy could be a strategic and profitable approach to improve supply chain performance in uncertain environments. 1 Introduction Firms are no longer competitive as independent entities such as buyer and vendor, but rather as an integral part of supply chain. Thus the success of a firm depends on its managerial ability to integrate and coordinate the network of business relationships among the supply chain members. According to this scenario, Vendor Managed Inventory (VMI) represents an interesting approach to stock monitoring and control, progressively considered and introduced in both service and manufacturing industries. One VMI policy, known as Consignment Stock (CS), may suppress the vendor's inventory, as this actor will use buyer's warehouse to stock its Please use the following format when citing this chapter: Tang, O., Zanoni, S., Zavanella, L. 2007, in IFIP International Federation for Information Processing, Volume 246, Advances in Production Management Systems, eds. Olhager, J., Persson, P., (Boston: Springer), pp. 321-328.
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322 Ou Tang, Simone Zanoni and Lucio Zavanella finished products. Furthermore, the vendor guarantees that the quantity stored in the buyer's warehouse will be kept between a maximum and a minimum level, and thus further reduces the costs eventually induced by stock-out conditions. The buyer picks up the quantity of material needed to meet his production plans and, consequently, the material used is paid to the buyer. The present study focuses on those situations where the deterministic conditions, necessary so as to apply Hill's model [2], do not prevail. The major effect determined by uncertain conditions is represented by stockout events (i.e., buyer's inability to promptly satisfy demand). This problem is generally approached by increasing reorder points and keeping safety stocks. Of course, an increased safety stock leads
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Stochastic Model for Consignment - A Stochastic...

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