Implementing a vendor managed inventory policy in a two-stage supply chain with stochastic demands

In a two-stage supply chain, implementing Vendor Managed Inventory policies (VMI), the supplier assumes, in addition to his own inbound inventory, the responsibility of maintaining inventory at its retailers and ensuring that they will not run out of stock at any moment.This paper discusses an optimization approach, considering the impact of demand uncertainty on the inbound as well as the outbound inventory, for a two-stage supply chain implementing VMI. In the proposed approach, retailers are first clustered to minimize the within-cluster travel costs and/or distances and are then replenished using an optimal direct shipping strategy satisfying some additional restrictions