Supply Chain Coordination with Service Level Constraint

Abstract

The coordination issue is investigated in a supply chain with service level constraint. The supply chain consists of one risk-neutral supplier and one risk-averse retailer. Both inventory model and coordination model are established and the supply chain performance measure is presented for coordination under the Pareto optimal criterion. Sequentially, the practicability of cost sharing contracts is examined to show that it could not achieve the complete coordination but Pareto improvement. Furthermore, the difference is demonstrated between service level constraint and downside risk constraint so that a strong/weak risk aversion definition is proposed. Since the strong risk aversion is indicated to be one of difficulties in supply chain coordination, it is suggested avoiding these scenarios by policies.