Decision analysis of individual supplier in a vendor-managed inventory program with revenue-sharing contract

Abstract

As a useful strategy to improve the flexibility of the system to manage uncertainty in supply and demand and to improve the sustainability of the supply chain, vendor-managed inventory (VMI) programs have attracted widespread attention in the field of supply chain management. However, a growing body of empirical literature has shown that participants’ decisions deviate significantly from the standard theoretical predictions. Under a VMI program, the supplier bears not only the production cost, but also the risk of leftover inventory. Moreover, the inequality among participants and different personalities of decision-makers in VMI programs may lead to the divergence of decision-making. To understand the supplier’s replenishment decision in view of the behavioral pattern, we propose a new inventory model for the supplier with the focus theory of choice. The proposed model conceives that the retailer evaluates each replenishment quantity based on the most salient demand for him/her instead of calculating the expected utility. By employing this inventory model, we construct a two-tier supply chain model with revenue-sharing contract and theoretically derive the optimal sharing percentage of the revenue and replenishment quantity. Results analysis gains managerial insights into the strategic selection of the retailer who faces suppliers with different personalities. Comparisons between the classic revenue-sharing contract model and the proposed model are also carried out by illustrative examples. This research provides a new perspective to analyze individual supplier’s behavior in a VMI program with revenue-sharing contracts.