This paper develops the integrated vendor-buyer inventory model with consideration of carbon offset, defective product, and the constraint of transportation capacity in terms of Vendor Managed Inventory (VMI). The goal is to minimize the total integrated vendor-buyer cost, and we proposes algorithm to solve the optimal decision variable. This paper also uses numerical examples to perform the sensitivity analysis on 8 important parameters respectively, and observe the variation of decision variables and optimal total integrated cost. Finally we compare VMI model in this paper with traditional integrated vendor-buyer model to analyze the advantage and disadvantage.
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