SUPPLY CHAIN COORDINATION WITH UNCERTAINTY IN TWO-ECHELON YIELDS

Abstract

This paper researches the coordination models in the supply chain where there are uncertain two-echelon yields and random demand. We analyzed three contracts of revenue sharing (RS), overproduction risk sharing (OS), and combination of RS and OS (RO), and contrasted them with uncoordinated model. We studied the optimal order decision for downstream manufacturer and the optimal production decision for upstream manufacturer. Numerical examples were presented to illustrate the results. The study showed that the RS contract and OS sharing contract both have their advantages and disadvantages and the RO contract could benefit the whole supply chain best. We found out that the OS contract gives the upstream manufacturer incentive to produce more so as to maximize the profit value, but the upstream manufacturer may receive less as the price of overproduced part increases. We also found out that under most scenarios, the supply chain benefits from the yields and demand risks reduction and generates a higher profit. But sometimes in the OS contract the downstream manufacturer profit can increase as yields randomness increases. And, in the uncoordinated case and OS contract, the upstream manufacturer profit can increase as demand randomness increases.