Abstract: Inventory models for items with stock-level dependent demand usually don't differentiate shelf inventory and warehouse inventory levels further. It is suggested in this paper that most retailers own warehouses in reality, hence the current inventory level is composed of warehouse inventory and shelf inventory. Since only shelf inventory affects demand, it is necessary for us to distinguish these two types of inventory. In this context, firstly, a general inventory model is established for items with stock-level-dependent demand under VMI scenario and the retailer's optimal order policy is gwen. Then the shelf capacity constraint is taken into account and the conditions under which the retailers will start using warehouse are shown. The optimal inventory and order decisions for items with shelf-and stock-level-dependent demand differences when a retailer has warehouse are also discussed. The research results provide valuable references for retailers making decision on whether to enable a warehouse for different items or not, and will also benefit retailers on how to make inventory policy when they own warehouses.

Key words: stock-level-dependent demand, shelf inventory, inventory policy