Supply Chain Coordination With Option Contracts In VMI System

Supply chain is becoming more and more important for the entrepreneur nowadays, which has become one of the most important core competences.Generally speaking, a full supply chain refers to the suppliers of raw materials, manufacturers, distributors, and retailers as well as consumers. Each of them will make the products value be added, this is just the reason why people consider it as a value chain. The products have circulated in the chain, which is bond to bring an increasing cost. Therefore, forming more saving from the supply chain has become an important way of cost reduction. As a result, various supply chain models have been applied in the practice, which aim to reduce the logistics cost and increase the flexibilities as well as the performance of firms.VMI is a very important supply chain model, which is very popular among large, companies at its first start. However, because of the global business compete of gradually vigorous and the scale of firm beginning to shrink as well as the more complicated business environment, the VMI model is beginning to show its defect. Then, how to coordinate it and make it suit for the complicatedly and diversified environment perfectly has become the most pressing issue for the researchers.Based the existed works and we have tried to coordinate the VMI system with option contract. We make some assumptions and build a mathematical model for supply chain coordination with option contract. When we resolve the model, we have got the analytic solution of retailer for his optimal decision and find the optimal search path for the supplier’s decision. At another hand, we set a benchmark to compare the effects of option contract to coordinate the VMI system, which is VMI system without option contract. The result demonstrated that the performance of VMI system with an option contract is much higher than that without an option contract. Furthermore, an insensitivity analysis of market parameters has been put and demonstrated the different functions of two kinds ordering style which is brought by option contract.The results of this paper have proved that the feasibility of the coordination with option contract in VMI system. It is found that there is exclusive and stable option contract for each specific VMI system, which makes the performance of participators, as well as the whole supply chain optimized, that is to say a Pareto improvement is realized. At the same time, the option contract provide more choices for the participators of the VMI system,which are two kinds of ordering style (Spot Ordering and Option Ordering).The option contract makes the risks be reallocated between supplier and retailer to coordinate the VMI system.