Optimal Supply Network with Both Vendor Managed Inventory and Direct Shipping

Abstract

We study a real-world supply network problem for one of the leading medical technology companies, which provides the products to hospitals (artificial heart valve, an artificial knee, and hip). The company considers setting up vendor managed inventory (VMI) in some hospitals with high demands for the products and a periodic review system is utilized for VMI. For those hospitals without VMI, the items can be shipped directly from a distribution center. A mixed integer nonlinear program model is developed to determine the optimal supply network with both VMI and direct shipping under a budget constraint. We developed an effective two stage heuristic method to solve the problem. The computational results show the effectiveness of the model and lead to a significant cost saving of the supply network.