Coordinating a loss-averse newsvendor with vendor managed inventory

Supply chain inefficiencies can result from incompatible incentives provided by independent decision-makers and also their risk aversion effect. This paper investigates how vendor managed inventory (VMI) affects a supply chain formed by a risk-neutral supplier and a loss-averse retailer. Under no coordination schemes, the supply chain inefficiencies result from the double marginalization combined with the retailer's risk effect. Coordination can be achieved by a modified quantity flexibility contract. Moreover, the supplier can share the risk of the retailer through VMI policy. It is shown that the optimal order quantity with VMI is higher than that without VMI and VMI improves the performance of the supply chain and achieve a win-win outcome.