Document Type : Original Article


Department of Industrial Engineering, Yazd University, Yaz, Iran.



Vendor-managed inventory (VMI) is a popular inventory management system that allows a vendor to access sales data and manage inventory levels for his retailers. The formulation of service level and pricing decisions are finite in the VMI model literature. The study examines how a manufacturer and its retailer communicate with one another to optimize their net profits through modifying service level, pricing, and inventory policy in a VMI system employing a Stackelberg game. The manufacturer produces a product and distributes it to several retailers at a similar wholesale price. The retailers subsequently offer the product at retail pricing in independent marketplaces. The Cobb-Douglas demand function could characterize the demand rate in every market, which is an enhancing function of the service level, however, a reducing function of retail prices. The manufacturer selects its wholesale pricing, replenishment cycles, backorder amount, and binary variable for production capacity to optimize profit. Retailers determine retail pricing and service levels so that they may optimize their profitability. Solution procedures are evolved for finding the Stackelberg game equilibrium from which no firm is inclined to deviate from maximizing its profit. The balance benefits the manufacturer while increasing the revenues of the retailers. If the retailers are prepared to engage with the manufacturer via a cooperative contract, the equilibrium could be enhanced to the advantage of both the manufacturer and his retailers. Ultimately, a numerical example is shown, along with the appropriate sensitivity analysis, to demonstrate that. 1) In certain circumstances, the manufacturer might benefit from his leadership and monopolize the additional profit generated by the VMI system. 2) The manufacturer's profit, and later the retailers' profit, could be increased more by the cooperative contract, in comparison to the Stackelberg equilibrium; 3) Market-related parameters have a substantial impact on the net profit of any enterprise.