Effects of Cognitive Biases on Performance of a VMI Program

This paper investigates how supply chain members acquire benefits in vendor-managed inventory (VMI) from a cognitive bias perspective. In a supply chain with a supplier and a retailer facing stochastic demand, the performance differences between the VMI and the retailer-managed inventory programs are analyzed and numerical experiments are conducted to investigate the effects of supply chain parameters. Conventional wisdom without considering rationality implies supplier's insufficient motivation to participate in VMI. However, both supply chain members can be actually better in VMI when paying attention to the match between their extent of rationality and the uncertain level of end demand.