Coordinating the VMI supply chain of deteriorating products through supply contract

This study considers a two-echelon supply chain with one vendor and one retailer for a deteriorating item under the vendor-managed inventory (VMI) policy. The study considers the time to deterioration follows a Weibull distribution, price-sensitive demand, and shortages are allowed and completely backlogged. We analyse the coordination of the VMI supply chain through a contract mechanism, i.e., a revenue-sharing contract. First, we formulate and compare the decentralised VMI and centralised models. Next, we propose a revenue-sharing contract to coordinate the decentralised VMI supply chain. The applicability of the proposed model is illustrated through numerical examples and sensitivity analyses. The results show that the supply chain's profit under the decentralised VMI system with a revenue-sharing contract increases and can reach the profit of the centralised system. The revenue-sharing contract can perfectly coordinate the VMI decentralised supply chain, increase the supply chain's profit significantly, and allocate the total supply chain profit to members fairly.