The value of coordination in manufacturer-customer relationships

This paper studies the relationship between a manufacturer and his customer. In the traditional setting, the customer manages her own inventory and places replenishment orders that are made-to-order by the manufacturer. Recently, supply chain initiatives such as Vendor Managed Inventory (VMI) have changed the traditional customer-manufacturer relationship. In a VMI relationship, the manufacturer becomes responsible for the management of his customer¿s inventory. Often, costs associated with inventory keeping are transferred from the customer to the manufacturer. Because of this cost transfer, VMI typically is more expensive for the manufacturer. However, being responsible for the inventory management, the manufacturer can coordinate the production and inventory control decisions. It is the goal of this paper to show how the manufacturer can realize this coordination. Moreover, we present a framework to categorize several VMI relationship types. We give insights on the structure of the problem as well as some insights on opportunities for cost savings. The insights are illustrated by numerical examples, which show that the value of coordination can be subtantial in many cases.