Sub-supply chain coordination in a three-layer chain under demand uncertainty and random yield in production

Abstract

One of the major objectives of modern supply chain management is to deal with the growing decentralization among the involved entities and hence minimizing the double marginalization effect inside the chain, especially when the end-customers' demand is not deterministic. To address this, a three-layer supply chain with one raw-material supplier, one manufacturer and one retailer is developed and studied in this paper. Effects of both supply chain coordination as well as sub-supply chain coordination are examined. Optimal order and production quantities are obtained for the centralized system which depicts the scenario under coordination. Optimal order quantities and expected profits of the individual channel actors are maximized locally in the decentralized system under commonly used price-only contract. Semi-integrated models are also studied under price only contract. The optimal strategies under different power structures are compared, and the effects of the channel parameters on the optimal strategies are also examined. Numerical example is given to illustrate the developed model.