Supply chain coordination with insurance contract

We propose an insurance contract under which the supplier shares the risk of overstock and understock with the retailer, improving the efficiency of the supply chain with a newsvendor-type product. We first show that the insurance contract could coordinate the supply chain, and obtain bargaining solution in the supply chain model. Then we investigate the effects of agents' risk aversion on the supply chain model and acquire the Pareto-optimal solution through the mean-variance approach. After that, we compare the insurance contract with the revenue sharing contract, focusing particularly on their differences. Finally, extensive numerical studies are conducted, and managerial implications are proposed. (C) 2010 Elsevier B.V. All rights reserved.