Information Technology and Management

, Volume 8, Issue 2, pp 133–145 | Cite as

Analyzing information-enabled stockout management under vendor-managed inventory

  • Yuliang Yao
  • Yan Dong
  • Martin E. Dresner


We develop a mechanism under vendor-managed inventory (VMI) by which a manufacturer provides an incentive contract to a retailer to convert lost sales stockouts into backorders. An incentive contract is required since the retailer’s efforts are not directly observable. We first show that when there are no limits on order quantities or inventory levels imposed on the manufacturer, the manufacturer will push inventory onto the retailer. The manufacturer minimizes the possibility for lost sales stockouts by maintaining high inventory levels at the retailer rather than by paying incentives to the retailer. However, modern information systems (IS), such as radio frequency identification (RFID), allow the retailer to monitor inventory at its premises and to enforce limits on order quantities. With strict limits on order quantities, the manufacturer will provide incentives to the retailer to convert lost sales stockouts to backorders. We analyze the conditions under which these incentive payments are likely to be highest.


Inter-organizational systems Vendor-managed inventory Backorders Incentives 



We thank the special issue co-editors, Hemant Bhargava, Chris Forman, Robert Kauffman, D.J. Wu, the associate editor, and two anonymous reviewers for their helpful comments and guidance. We also express gratitude for the feedback received from participants at INFORMS CIST 2004.


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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.College of Business & EconomicsLehigh UniversityBethlehemUSA
  2. 2.Carlson School of BusinessUniversity of MinnesotaMinneapolisUSA
  3. 3.Robert H. Smith School of BusinessUniversity of MarylandCollege ParkUSA

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