Vendor managed inventory with consignment stock agreement for a supply chain with defective items

The pursuit of better coordination schemes is crucial for contemporary supply chains to survive in a highly competitive environment. A supply chain may employ revenue sharing, information sharing and quantity discounts etc. to gain that viable edge. Another recent trend is to store vendor's inventory at the buyer's warehouse, known as vendor-managed-inventory (VMI) with consignment stock (CS) agreement. This paper brings the present literature in VMI with consignment stock closer to real life by introducing the notion of screening defective items. A single-vendor single-buyer supply chain is considered where the vendor ships every production batch in a number of lots to the buyer's warehouse. The buyer withdraws and screens these products while fulfilling the market demand. An analytical model is developed to depict this scenario. The impact of different fractions of defective items, storage costs as well as disposal schemes is also studied. The results indicate that the prominence of the proposed storage scheme over the conventional one remains proportional to the size and number of shipments in a cycle. Besides, the non-financial component of storage costs has a critical impact on the cost of the supply chain.