By committing to a long-term replenishment contract, suppliers can mitigate the pressure to find new customers
and afford to charge a discounted price to buyers seeking to lower their purchasing costs. In this paper, we
develop an analytical model from buyer's perspective for the contracting process to investigate the
buyer-supplier interactions. Based on the developed model, we propose an algorithm to derive optimal strategy
for the contract.
We consider a system with a single buyer and a supplier in a situation where the buyer’s inventory is
controlled by (R,S) policy under VMI setting. According to the contract, the supplier should replenish the
buyer’s inventory up to a fixed level every R times during a specified period. The buyer purchases any deficient
amount from a spot market at a higher price. We show by computational experiment that our proposed algorithm
finds the global optimum solution.