Abstract: How to distribute incomes under vender managed inventory (VMI) is directly related to profits of all participants. For a long time, this issue has been discussed in academic based on the downstream segment of supply chain. In this work, by VMI, the upstream segment is addressed. In considering the impact of implementing VMI on the parameters of supply chain, economic models are developed. Based on this model, the profit distribution mechanism of VMI at upstream segment is constructed according to the basic logic of Shapley value algorithm combining with an idiographic example test. Results indicate that, through the mechanism, the profits created by carrying out VMI at upstream segment are distributed reasonably among participants. Thus, the increased costs of accessory suppliers from managing manufacturer inventory could be offset, and a win-win goal can be achieved. In reality, this mechanism could be implemented by an income sharing contract constituted by all partners before carrying out VMI. Finally, the conclusions are compared with the former counterparts, and the opportunities are predicted.

Key words: vender managed inventory (VMI), profit distribution mechanism, Shapley value algorithm, supply chain