Abstract: The optimal promotional effort and supply quantity of the center control mode and VMI mode are analyzed in a single-period supply chain facing stochastic effort dependent demand. Then, a sales rebate contract model with retailer's paying the supplier a surplus subsidy for the products that are not sold out is established in VMI. Whether the retailer pays the surplus subsidy to take part in the sales rebate contract or not is also analyzed and that the contract can improve the supply chain revenue is shown. Furthermore, the contract is modified to be possible to realize the optimal revenue in supply chain. Finally, a numerical example is presented to illustrate that the sales rebate contract can increase supply quantity and promotional effort and significantly improve supply chain revenue.

Key words: VMI, sales rebate contract, promotional effort, surplus subsidy, supply chain coordination