Abstract: The profit distribution issue is discussed for the upstream segment of a supply chain under vender managed inventory (VMI) mode. This segment of the supply chain includes a supplier and a manufacturer. In this part of the supply chain, there are three different environments in terms of the decision making: equal position for both the supplier and manufacturer, supplier predominating, and manufacturer predominating. With the transformation of ordering strategy and ordering cycle considered, mathematical models for different cases are developed to analyze the effect of VMI on the upstream of the supply chain. Then, the profit distribution mechanisms for the three different environments are analyzed. It shows that the supplier can increase prices in some extent to get more profit, while the manufacturer can reduce inventory cost so as to get more profit without increasing its product prices. Thus, winwin can be achieved and the VMI mode can be applied in the upstream of a supply chain.

Key words: vender managed inventory (VMI), supply chain, profit distribution mechanism, win-win