Supply Chain Coordination Under Financial Constraints and Yield Uncertainty

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Capital deficit due to capital constraints is a very common issue in supply chains and suppliers (such as farmers) often face yield uncertainty. A coordination problem for a supply chain with capital constraints and yield uncertainty is considered in this paper. In order to improve the supply chain, a buyback and risk sharing (BBRS) mechanism is proposed, in which the distributor shares the yield uncertainty risk with the supplier by purchasing the overproduced products at the end of the production season, and the supplier buys back the unsold products from the distributor at the end of the sales season. The results indicate that under the BBRS, the profits and the strategies of the supply chain are the same with those under the centralized case. In addition, the proposed BBRS mechanism has a built-in mechanism to allocate the spillover profit between the supplier and the distributor, and the actual allocation may depend on their negotiation skills. The managerial insight is that, for the capital constrained supply chain with yield uncertainty, it can be coordinated if the yield uncertainty risk and the market demand uncertainty risk are shared between the supplier and the distributor.