Coordination of VMI supply chain with replenishment tactic under risk aversion and sales effort

Abstract

This paper considers a vendor-managed inventory (VMI) supply chain consisting of a risk-averse supplier and a risk-neutral retailer engaging in sales promoting efforts. Under the conditional risk at value, we examine three different types of contracts with the replenishment option for coordinating the VMI supply chain, namely, a risk diversification and cost sharing (RDCS) contract, an option and cost sharing contract, and a subsidy and cost sharing contract. Firstly, we derive the optimal production strategy and analyze the capability of each of the proposed contracts in coordinating the VMI supply chain. We find that all of those contracts can achieve coordination of the supply chain with Pareto improvement. Secondly, we also show that both the supplier and the retailer prefer the RDCS contract over the other two contracts. Finally, we use numerical experiments to analyze the impact of risk aversion on contracts’ parameters.