Coordinating VMI supply chain under yield uncertainty: Option contract, subsidy contract, and replenishment tactic

The paper introduces an option contract to improve the performance of a vendor-managed inventory (VMI) supply chain under yield uncertainty. We first assume that there is a deterministic demand and find that the option contract can coordinate the supply chain and arbitrarily allocate coordinated profit among members. Compared with a subsidy contract, we then investigate the relationship between the option contract and the subsidy contract in the paper. When a replenishment tactic is considered in the model, supply chain coordination and Pareto improvement can be achieved by introducing the option contract. The paper further shows that the option contract also can effectively coordinate the supply chain when demand is stochastic. Numerical studies are conducted to illustrate our models and validate our findings.