Asymmetric information in vendor managed inventory systems

In this dissertation I examine vendor managed inventory (VMI) contracts and the gains and losses associated with their use. The research investigates the question, "Under what conditions do VMI systems lead to 'better' quantity decisions and increased supply chain profits?" The research is motivated by recent emphasis on supply chain management contracts and their effect on company performance.;In the first part of this dissertation I theoretically analyze inventory management contracts and develop predictions regarding the conditions under which such contracts will be utilized and the resulting effects on the inventory levels and profits of the contracting parties. I develop a "double" newsboy model in which the retailer makes an order decision and the manufacturer makes a production decision. The models emphasize the asymmetric information present in the manufacturer-retailer relationship; retailers often receive multi-dimensional signals and can only communicate a one-dimensional signal.;The second part of this dissertation tests the empirical predictions derived in the first part using survey data collected from 100 manufacturers in the Food and Consumer Packaged Goods industry. It specifically examines: (i) the characteristics of firms that implement inventory management contracts, and (ii) the operational impact of adopting such contracts.;The theoretical analysis indicates that the manufacturer will select a VMI system when the retailer's signal about demand is precise, the information transmission is reliable and both retailer and consumer demand are variable. A manufacturer that receives information from a noisy system is better off selecting a traditional relationship. With a VMI system the manufacturer produces and delivers first-best quantity levels and charges the retailer a lower wholesale price. The field-based study corroborates the finding that manufacturers utilize VMI when the information linkages are sophisticated and demand is variable. Overall, this study questions the usefulness of VMI in certain situations. It finds that VMI is not unambiguously good for companies, that a positive impact is expected from its use if both companies are dedicated to assuring that the information is precise and reliable.