Flexible contract design for VMI supply chain with service-sensitive demand: Revenue-sharing and supplier subsidy

Jianhu Cai, Xiaoqing Hu, Pandu R. Tadikamalla and Jennifer Shang

European Journal of Operational Research, 2017, vol. 261, issue 1, 143-153

Abstract: To coordinate a VMI (vendor-managed inventory) supply chain with service-level sensitive customers, we relate retailer's service level to customer demand. We establish the dynamic game relationship under a revenue-sharing contract. A pure revenue-sharing contract, focusing on revenue-sharing ratio, often forms a competitive relationship among SC members, as the optimal sharing ratio is determined by the game leader and may fail to optimize SC performance. An improved mechanism is necessary to avoid sub-optimality. In this research, we propose three flexible subsidy contracts for VMI supply chains: (i) subsidizing all surplus products; (ii) subsidizing the inventory that exceeds the target level and unsold; (iii) subsidizing the inventory that exceeds target regardless it is sold or not. These contracts help SC members to arrive at optimal price, revenue-sharing ratio, inventory target, subsidy rate; and to commit inventory early. The proposed mechanism can better ensure SC collaboration, and bring the SC to Pareto improvement by allowing members to negotiate, share profit, subsidize suppliers for their risks, and select from alternative contracts under each VMI setting. They enhance service levels, maximize SC performance, and share SC profits fairly. Numerical examples are provided to validate our findings and to derive managerial implications.

Keywords: Supply chain management; Flexible contract; Supplier subsidy; Revenue-sharing; Service-sensitive demand (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221717300784
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:261:y:2017:i:1:p:143-153

DOI: 10.1016/j.ejor.2017.01.043

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().