E-channel management under vendor-managed inventory by option and conventional contracts: the influence of outsourcing decisions

In the era of widespread e-commerce adoption, businesses encounter challenges in managing e-channel demand and production constraints. This study explores an e-channel with an e-retailer with no pattern demand, a primary supplier, and a backup supplier to address these issues through outsourcing. The primary supplier, facing limited production capacity and potential failure, seeks assistance from the backup supplier under a vendor-managed inventory (VMI) strategy. Two contracts, a conventional contract with penalties for rejecting units and an option contract allowing negotiations, are compared. Results indicate that the option contract promotes a win-win scenario, enhancing overall e-channel efficiency and earnings compared to the conventional contract. Negotiations facilitated by the backup supplier contribute to e-channel coordination. However, if the option price exceeds the penalty difference, the conventional contract may be more attractive to the primary supplier.