Smart Supply Chains with vendor managed inventory, coordination, and environmental performance

A dynamic brick-and-mortar Supply Chain (SC) evaluates the benefits of implementing smart applications and intelligent systems to improve the efficiency of a Vendor Managed Inventory (VMI). In the SC game, the manufacturer sets the production rate and replenishes the inventory at the retailer’s store. The retailer sets the price, which affects both the sales and the inventory. Firms share the revenues and the inventory costs through a sharing agreement. The inventory dynamics increase in the production rate, decrease in the sales and vary according to some stochastic and time-independent error terms. The adoption of a smart application allows the SC to remove these error terms. Nevertheless, the consulting company implementing the intelligent system charges fees that depend on the error term amplitude and inventory level. Furthermore, intelligent solutions allow the SC to better satisfy the consumers, although their impact on production and emissions may be detrimental questioning whether they lead to a responsible digitalization. We identify the conditions under which the adoption of a smart system is economically beneficial for the whole SC as well as its operational, environmental, and SC coordination implications.