Vendor-managed inventory supply chain coordination based on commitment-penalty contracts with bilateral asymmetric information

Vendor Managed Inventory (VMI) is adopted to improve the efficiency of overall supply chain. Research shows that asymmetric information might cause supply chain inefficiency. This study looks at how VMI supply chain coordination can be achieved in an asymmetric information environment. We propose a commitment penalty contract to improve the performance of a VMI supply chain where the manufacturer holds private production cost information and the retailer holds private demand information. The replenishment quantity and contract under symmetric information and bilateral asymmetric information are solved respectively. We find that the commitment penalty contract may reveal the private information of the manufacturer and the retailer can coordinate the supply chain under the asymmetric information of bilateral information. We present numerical examples to illustrate the effectiveness of the contract and develop managerial guidelines.